There was no let-up for Spain in the financial markets after the opposition conservative Popular Party's resounding victory in the general elections on Sunday, with the country's risk premium rising and the stock market falling.
At 2.50pm, the spread between the benchmark 10-year government bond and the German equivalent was up 23 basis points at 464 basis points, while the blue-chip Ibex 35 index was down 1.8 percent. The rest of the euro-zone markets also remained under pressure due to the sovereign debt crisis.
The PP won 186 seats in the poll for a comfortable absolute majority of 11 seats. The ruling Socialists garnered 110 seats, while the party with the third most representation in the lower house was the center-right Catalan nationalist group CiU, with 16 seats.
The markets had already factored in an absolute majority for the PP, which in theory should make it easier for it to push further painful reforms through parliament to appease the markets. The PP also controls most of the country's regions, which will also allow the central government to lean on them further to rein in spending in order to meet the government's target of reducing the public deficit to 6 percent of GDP from 9.2 percent last year.
The markets, however, are unlikely to give PP leader Mariano Rajoy much of a honeymoon. "If the markets are to regain confidence (slashing the country risk premium) the key will be how quickly Spain's new government announces measures and structural reforms that please European authorities and the markets," brokerage Banesto Bolsa said in a note Monday to clients.
Viewed as a pro-business party, however, the markets initially should give Rajoy the benefit of the doubt. "Even though the market has already priced in a change of government with an absolute majority, against the current backdrop of maximum volatility, we see greater upside than downside for Spanish equities," Banesto said.
In its note to clients on Monday, brokerage M&G Valores said support from the European Central Bank in the form of purchases of Spanish government debt in the secondary market should be enough to maintain bond yields at current levels in anticipation of a new batch of reforms by the incoming administration.