Spain needs to escape current political impasse to confront vulnerabilities in its rating

Spanish banks ratings have been revised upwards

Alvise Lennkh & Dennis Shen (Scope Ratings) | Political events in Spain (undecided), Portugal (stable) and Italy (divided) have implications for the three countries, visible in their divergent capacity to reduced the high levels of public debt.

The different political perspectives of these three countries with a limited margin of fiscal manoeuvre shows how the governments can:

• Use still benign economic conditions to reduce the high burden of public debt through structural actions
• Build on a favourable economic environment to reduce the debt/GDP ratio through better fiscal cycles without structural initiatives
• Use the favourable environment to reverse fiscal consolidation.
These decisions have significant implications for confronting the underlying fiscal imbalances and, therefore, affect the capacity of the governments to confront a future economic recession.

Spain (A-/Stable):

Spain is facing its third general election in four years on 28 April. The crucial question, according to Alvise Lennkh, analyst at Scope, is whether these elections will produce a government with a sufficient parliamentary majority to implement reforms which reduce the country´s level of public debt, reform the labour market and improve competitivity. “Spain needs to escape the current political impasse to confront the relevant vulnerabilities in its rating”.

Spain´s debt/GDP ratio, which reached its high in 2014 around 100%, has remained relatively stable at 97% in 2018 and is expected to fall only modestly to 92% by 2024, according to recently published IMF forecasts.
This relatively modest decline, despite high growth rates (2.5% in 2018), is due to the country´s high primary structural deficits, around 3% of GDP, one of the highest in the Eurozone. Successive minority governments since 2016 have not dealt with this question.

Key political events remain in the future

• The result of the April election (with around 40% of Spanish voters still undecided, and 15% who do not know if they will vote for a party of the left or right)
• Whether events in Catalonia (dependent on the result of the trial of the separatists) will also give rise to regional elections at the end of the year.

Political cooperation between the central government and the regional Catalan authorities which creates the conditions for economic and fiscal reforms would be positive for the debt, while an extension of the political paralysis seen in recent years – for example, through a hung parliament or continued insistence on independence by the Catalan leadership – would limit the rating to the current level A-/Stable.