GI Research Market Commentary
Mr. Sánchez’s comeback as PSOE leader and Catalonia’s news remind investors of
latent political risk in Spain
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Yesterday, Pedro Sánchez won the primaries of the Spanish Socialist party (PSOE) with a
convincing 50.2%, regaining the leadership he had left in October 2016.
His comeback could result in a stiffer opposition to PM Rajoy’s minority government, though
snap elections remain only a tail risk at the moment given that opinion polls are still unfavorable
for the PSOE.
In addition, the Spanish newspaper El País reported today that the Catalan regional government
has drafted a secret bill to manage the transition towards independence.
The Catalan government wants to hold a referendum over independence in early autumn, though
this would violate the Spanish Constitution. It has also threatened a unilateral move should PM
Rajoy refuse to deal with Catalan requests.
Spanish government bonds underperformed moderately this morning, but we do not consider it
as a start of a protracted period of weakness.
Yesterday, Pedro Sánchez regained the leadership of the Spanish Socialist party (PSOE) after winning the
primaries with 50.2% of the votes. He defeated the president of the Autonomous Community of
Andalusia, Susana Díaz (39.9%) and the former president of the Autonomous Community of the Basque
Country, Patxi López (9.9%). Mr Sánchez had resigned from the party leadership in October 2016, a
decision that eventually led to the abstention of the PSOE in the investiture vote of PM Rajoy and the
formation of a People’s Party (PP) minority government.
The three milestones of Mr Sánchez’s campaign were the following:
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He stressed the need for the PSOE to pursue a leftist agenda and reiterated his “No” to the
support / abstention favoring the PP-led government. Antonio Hernando, the PSOE’s speaker in
Congress and a supporter of the PSOE’s abstention, resigned following the result of the primaries,
reflecting the likely shift in the PSOE’s stance towards the PP.
In terms of political cooperation, Mr Sánchez distanced himself from the left-wing Unidos Podemos
but called for an alliance of progressive forces. While this is a rather vague statement, it could
suggest that he may try to strengthen the relationships with both the centrist and liberal Ciudadanos
(C’s) and the less populist wing of Unidos Podemos (the party faction usually identified with Íñigo
Errejón).
Spain as a “nation of nations”. Mr Sánchez supports a revision of the constitution to strengthen
the powers of autonomous communities like Catalonia, where he gained 81.9% of the votes in the
party primaries. He sees this strategy as the only viable solution to avoid a unilateral independence
of Catalonia, and he blamed PM Rajoy for the heightened tension between the state and the Catalan
government.
While Mr Sánchez’s victory will likely lead to a much stiffer stance of the PSOE against the PP-led
minority government – a shift that would make law approval more difficult – we do not see a major risk of
early elections at this point in time. Indeed, opinion polls show that the PSOE is still slightly below (21.9%
vs 22.6%) the level secured at the last general elections in June 2016, while the strengthening of C’s and the
decline in Unidos Podemos’ support would make a leftist coalition (PSOE and Unidos Podemos) numerically
even more difficult than today.
The other major news released by the Spanish newspaper El País earlier this morning is on Catalonia and
the call for independence. The report affirmed that the Catalan regional government has drafted a secret
bill to manage the transition towards independence should PM Rajoy’s government keep opposing to the
separatist referendum. The president of Catalonia, Carles Puigdemont, and his government want to hold the
referendum in late September or early October, but PM Rajoy has repeatedly affirmed this would violate the
Spanish constitution.
We do not expect the clash between the Spanish government and the Catalan authorities to abate
anytime soon. That said, the support for Catalan independence is far from granted. The latest opinion
poll released by GESOP in March showed that 48.5% would oppose to the independence, with 44.3%
backing it. Between 2012 and 2014, the support for independence was above 50%, suggesting that the
momentum has weakened along with the strong economic recovery seen in the last few years.
Looking at financial markets, the reaction to the political events over the weekend was rather muted
this morning. The 10-year Bono/Bund spread was flat at 121 bps. However, the widening of the 10-year
BTP/Bono spread was a bit more noteworthy. After Spanish government bonds had underperformed Italian
ones already last week, the spread tightened another 4 bps to 52 bps.
Nevertheless, we do not regard it as the beginning of a lasting underperformance of Spanish
government bonds. To start with, with the election of Macron as new French president the main political
risk in the euro area is off the table until further notice. Hence, the political environment is seen to remain
supportive for Southern European government bonds – at least in the near term. Moreover, the economic
situation in the euro area is solid and a loss of momentum of the upswing is not on the cards. Particularly,
the Spanish economy is expected to keep showing strength. The above average growth of 0.8% qoq in the
first quarter lays the basis for an annual growth rate of 2.6% in 2017 (well above the 1.7% for the euro area
overall). In addition, the ECB will continue to pursue its QE programme until the end of the year. Although a
phasing out of purchases in 2018 is likely (and speculations about it is expected to gain momentum in H2),
the central bank’s demand is an important support for bond markets for the time being. Furthermore, the
carry remains a strong factor for higher yielding bonds. Despite the strong performance of Spanish
government bonds, compared to German Bunds and depending on the tenor, Spanish Bonos still yield
between 40 bps and 165 bps more.
While the above factors tend to foster Southern European bonds in general, the uncertain political
situation in Italy makes a continuation of the recent BTP rally rather unlikely. With the approaching
new elections (at latest in Q1 2018), financial markets are expected to focus on the strong support for euroskeptical parties and the difficult government formation after the election. All in, among euro area
government bonds, Spanish Bonos remain an attractive alternative.
Authors:
Luca Colussa Florian Späte