Investors view Spanish political instability as risk to euro

The political uncertainty in Spain is starting to worry international investors.

The positive outlook on the Spanish economy in late 2015 has given way to prudence due to acting Prime Minister Mariano Rajoy’s inability to form a new government following inconclusive elections.

So far, financial markets are not reflecting these fears

Concerns over Catalonia, where the separatist winners of the September election have been similarly unable to form a government, are also playing a role.

On Friday, investment bank Goldman Sachs released its 2016 report on risks to the European economy, which include the refugee crisis, a slowdown in the Chinese economy, and political problems deriving from a potential exit from the European Union by Britain or continuing instability in Spain.

“New elections in 2016 are very likely if the alliance of like-minded parties proposed by Prime Minister Mariano Rajoy does not materialize,” warns the report, which was headed by chief economist Huw Pill.

In that case, the political uncertainty would almost certainly spill over into the economy, affecting consumer confidence and ultimately the economy’s outlook, says the investment bank.

So far, however, financial markets are not reflecting such fears. On Friday, the gap between Spanish and German 10-year borrowing costs was 116 basis points.

Goldman Sachs is not the first foreign analyst to express fears over Spain’s political situation. The ratings agency Fitch has already underscored that the uncertainty will lead to a slowdown in reforms.

Meanwhile, experts at Italian bank Unicredit hold that anything other than a grand coalition between the Popular Party and the Socialists will inevitably lead to early elections sooner rather than later.

English version by Susana Urra.