Spain: Odds of New Elections in May

Published on December 22, 2015

The Spanish elections that took place on December 20 failed to determine a clear winner, as pretty much everyone expected.

What most did not expect was that the results and more specifically the weak showing of the Ciudadanos new, center-right, alternative party would make it almost impossible for the incumbent winner, Prime Minister Mariano Rajoy, to put together a workable coalition in the Congreso de los Diputados, Parliament’s lower house, with his center-right Partido Popular. And so Spain is now stuck in an ugly political stalemate.

*** While there are rumors of a push by Brussels for a negotiated, grand coalition-style deal between Rajoy’s PP and Pedro Sanchez’s Socialist Party (PSOE), the odds appear – for now – to be strongly in favor instead of a return to the polls, most likely in May. Sources within the PSOE believe chances of an election are as high as 90%, however we are slightly more cautious given pressure for a grand bargain from Brussels, but still place the odds at 70%. ***

*** In the meantime Rajoy has begun negotiations with other parties even before King Felipe VI has formally tasked him with forming a new government as the leader of the party that won the elections. Rajoy has until January 13 to put together a plan, whether it be a minority government or a multi-party coalition. A failure at that point to pass the confidence vote by Rajoy would result in the opening of a two-month period during which alternative coalitions could in theory be built. ***

*** But – in a modicum through all this of good news for markets – we have been told that a turn at that point to an alternative leftist government formed by the runner-ups “a la Portuguese” is unlikely. Besides even whether it is constitutionally possible for King Felipe VI to appoint Pedro Sanchez, the leader of a party that (badly) lost the elections, as Prime Minister, an alliance that would be needed by PSOE with Podemos would stir a rebellion within the PSOE party ranks whose regional leaders, or “Barons” as they are called, are strongly opposed to Pablo Iglesias and his anti-establishment party. ***

Few Options for Rajoy

Despite an election result that was clearly disappointing for the PP leadership – they were confident they could get at least 130 – 135 seats – the Spanish constitution squarely puts Rajoy, the leader of the relative majority party, in charge of the first attempt to form a government.

Rajoy is currently negotiating with other parties with two options in mind: either to get a sufficient number of confidence votes that gets him over the 176 delegate threshold needed for an absolute majority in the chamber, or to form a minority government through the abstention of at least 105 Members, which would leave the opposition with only 122 no confidence votes against the PP’s 123 in favor.

But while Ciudadanos, as expected, has diligently backed the PP and pledged at least an abstention on a confidence vote (but we suspect it could also vote in favor if needed), the PSOE and Podemos have refused to yield and maintain they would vote “no,” which, as things stand, leaves Rajoy in need of a miracle to avoid a new election.

There are other parties out there, of course, but the Catalan pro-independence parties are a no-no for the PP, and so Rajoy could probably count only on the 6 MPs of the Basque PNV (Partido Nacionalista Vasco) and on the single MP elected for the Canary Islands regional party for small party support. That would still leave him way below the threshold needed to govern.

Rajoy himself might not disdain an assist from the Socialist party, and he is ready to offer them significant concessions. But there, he has for now also hit a wall.

There is currently no appetite in the PSOE to save Rajoy after what has been a truly contentious campaign, and especially after an election in which the old party of Felipe Gonzales already lost an enormous amount of ground to its left, in favor of Podemos.

And should Rajoy be unsuccessful in his bid, the chances of an alternative, leftist government similar to the one that was successfully formed in Portugal are remote.

To underscore PSOE’s weakness Sanchez does not even have much with which to bargain with the Catalan secessionists, whose MPs he would badly need if he were to have any serious chance of putting together a coalition. And a constitutional reform to appease the Catalans, of the kind endorsed by far-left Podemos leader Pablo Iglesias, is out of the question while the PP is in control of the Senate.

So even as the situation can still change, especially if Brussels and the King both put their full weight behind the grand coalition option, as it stands Spain seems to be headed in the direction of new elections.

Markets may find some small comfort in the meantime that the reigns at least will not be turned over to the runner-ups on the left.

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