BMI View: While Spain's centre-right government cannot be solely blamed for the depth of Spain's current macroeconomic troubles, they have nonetheless contributed to the rapid deterioration in government borrowing costs and broader credit conditions in recent months by, at times, failing to be proactive in addressing the country's fiscal and banking sector woes. With a eurozone sovereign bailout for Spain now looking unavoidable, and a lost decade ahead for the domestic sector, we believe the People's Party will find it difficult to arrest the decline in its popularity, leaving re-election in 2015 looking like a pipedream.
As we have stated previously, the macroeconomic woes currently facing the Spanish economy cannot be blamed solely on the ruling People's Party administration ( see our online service, May 4, 'Risks From Divergent Policy Goals'), given that they have only been in power for eight months (major deteriorations in the construction industry, housing sector and labour market have been playing out since 2007) and have maintained the previous government's focus on fiscal austerity. Indeed, in light of sustained pressure from eurozone finance ministers and financial markets, Spain's new administration has had little option but to do otherwise.
What is more alarming is that, rather than stabilise, Spain's crisis appears to have accelerated since Prime Minister Mariano Rajoy came to power and this is at least partly the result of weak, and at times delayed responses by the political leadership to the country's economic woes. The most obvious example of this came in the early months of 2012 when the prime minister delayed the announcement of the 2012 budget until after Andalucía regional elections had been held (which the PP went on to lose).
The need for transparent and swift measures to tackle deteriorating state budgets has been demonstrated in recent months by some of Spain's regional government's requesting financial support from the central government in July owing to worsening credit conditions. Rajoy has also been criticised for indecision regarding the state bailout of Spain's banking giant Bankia in late May, as well as his party's reportedly close connections with ex-Bankia chief Rodrigo Rato.
|Crisis Has Escalated Since Rajoy's Rise To Power|
|Spain - 10-Year Government Bond Yield, %|
At the same time, Spain's macroeconomic trajectory has worsened significantly, with house prices continuing to slide and the unemployment rate close to 25%. The moribund domestic economy is facing a lost decade of growth, and this is further exacerbated by the government's push for ever greater fiscal austerity. Given the negative feedback loop this creates, we still remain doubtful that the government will meet its fiscal deficit targets over the next few years. At the same time, the worsening picture abroad, particularly amongst Spain's major trading partners in the eurozone, means that Spain will be unable to export its way out of its macroeconomic morass. As a result, we were recently prompted to revise down our medium-term growth forecasts, now targeting a 0.5% contraction in 2013 (on the back of a 2.1% decline in real GDP this year) followed by modest growth of 0.5% in 2014 ( see our online service, July 30, 'Spain And Italy GDP Forecasts Revised Down'). Growth will average just 0.8% through to 2021.
While Spain's government has been fairly proactive with respect to delivering further fiscal consolidation at the national level, and addressing Spain's long-standing competitiveness issues, as evidenced by labour market reforms pushed through earlier in the year, this has not helped to curry favour amongst investors, and this is reflected in the steady rise in borrowing costs for the government since coming to power at the end of last year. Given how far financial conditions have deteriorated for Spain, we believe the country will struggle to avoid a full-blown sovereign bailout. To what extent this is the fault of wasted political capital on the part of Prime Minister Rajoy in his first few months in power, or the legacy of Spain's enormous construction and real estate collapse since 2007 is unclear. However, the People's Party will almost certainly bear the brunt of any domestic political backlash on the back of requesting a eurozone bailout.
|A Huge Drop In Support In Just Eight Months|
|Spain - Polling Data (Public Support for PSOE & PP), %|
According to the Centre for Sociological Research, the ruling People's Party has already seen its popularity drop considerably since its victory in parliamentary elections back on November 20. Public support of around 45% helped the People's Party to secure an absolute majority (which the previous Socialist administration had not enjoyed), however, this figure has dropped to around 37% as of early August ( see chart below). The silver lining for the People's Party is that this support has not directly translated into improved support for the opposition Spanish Socialist Workers' Party (PSOE), which has seen its popularity improve only marginally from about 29% on election day last year to 30% in August 2012.
However, if the PP were to see its public support continue to trend lower, which is entirely conceivable given the degree of fiscal austerity already being enacted at the central and regional government level and in light of the depression setting in within the domestic economy, the ruling administration will find it extremely difficult to win re-election in 2015, let alone resisting potential calls for early elections from opposition parties.
|System of Government||Parliamentary monarchy, universal suffrage. Monarch is the head of state and supreme commander in chief of the armed forces. Executive branch in the form of the Council of Ministers, headed by the president of the government (functionally, a prime minister). Bicameral legislature (cortes generales) divided between the congress of deputies (Congreso de los Diputados, 350 seats) and senate (Senado, 264 seats). Decentralised state system, with 17 autonomous communities and two autonomous cities.|
|Head of State||King Juan Carlos I since November 22 1975|
|Head of Government||President of the government (prime minister) Mariano Rajoy since November 2011|
|Last Election||Legislative elections - November 20 2011|
|Composition Of Current Government||People's Party holds a plurality in the congress of deputies.|
|Key Posts||Economy Minister Luis de Guindos; Minister of Foreign Affairs José Manuel García-Margallo y Marfil|
|Main Political Parties (number of seats in parliament)||Congress of deputies - Partido Socialista Obrero Español, PSOE (110 seats), Partido Popular, PP (186 seats), other (54 seats). Senate - PP (48 seats), PSOE (136 seats), other (80 seats).|
|Next Election||Legislative elections (congress and senate) to be held no later than November 2015.|
|Ongoing Disputes||Ongoing dispute with the UK over the status of Gibraltar. Morocco protests Spanish control over the coastal enclaves of Ceuta, Melilla and the islands of Peñón de Vélez de la Gomera, Peñón de Alhucemas and Islas Chafarinas. Minor dispute with Portugal over the territory of Olivenza.|
|Key Relations/ Treaties||Member of the EU and the eurozone currency bloc. Member of several major international organisations, including the UN, NATO, WTO, OECD and EBRD.|
|BMI Short-Term Political Risk Rating||70|
|BMI Structural Political Risk Rating||80.2|