How will the Spanish Congress Vote?

As the no-confidence vote against current Mariano Rajoy beckons, what will happen to the EUR?

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The Spanish Congress is expected today to vote on a no-confidence vote against current Prime Minister (President of the Government) Mariano Rajoy. The motion was presented by the leader of the Socialist Party (PSOE), who has managed to assemble a shaky coalition of minority parties with enough votes to barely pass the motion – if all the members of the parties vote according to their leaders’ commitment.

The only two options to avoid a no-confidence vote would be for Rajoy to resign or call elections, and he’s been adamant that he will do neither.

What does a no-confidence vote in Spain mean?

A no-confidence vote in Spain is “constructive”; which means that if it passes, the leader who called it will (practically) immediately replace the current Prime Minister. In this current case, that means Rajoy’s government would end with the vote; the King would then mandate Pedro Sanchez to form a government, which he could do as soon as Monday.

Spain would move from a conservative to a socialist government over the weekend, with the implications that would have on the markets.

The PSOE is pro-EU and non-populist; it’s a traditional party that was in power before Rajoy. Implications for the Euro would be expected to be minimal.

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If Rajoy survives the vote…

Rajoy is not out of the woods even if he manages to squeak by with a couple of dissenting votes from opposition parties; the populist leftist party Juntos Podemos has already promised to call a second no-confidence vote should this one fail.

Rajoy is governing with a minority – this is the second no-confidence vote he’s faced – and with the continuing corruption scandal that hit his party, his political support is weakened. He’s likely to continue to face further challenges going forward.

The way to avoid that would be to call for early elections, which is something that his coalition partners, Ciudadanos, are pushing him to do. Should he call for elections, the soonest that would happen would be on July 29th.

So if there are elections…

The potential for elections leads to a lot more uncertainty, which could have a bigger impact on the markets than if Rajoy lost. Recent polls show that the traditional parties have lost support, and that the leading parties would be Ciudadanos in first place, with Podemos and PSOE battling over second, leaving the current ruling PP trailing in fourth.

Given current trends, a likely result of the election is a Ciudadanos government lead by Albert Rivera. Ciudadanos is a liberal conservative (as opposed to the more traditional conservative PP) party that is pro-EU. Consequently, should they win the election, it’s not expected to have a terrible impact on the Euro (unlike in the recent Italian debacle).

However, they are a new party, and the consequent uncertainty could lead to economic jitters that would reverberate through the periphery. Ciudadanos has an ambitious economic reform program, that while widely considered to be pro-business, it might face considerable opposition in Congress which could cause an eventual Rivera government to be less effective.

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But the last time there were elections…

The real challenge, whether it’s through a no-confidence vote or an election, is forming a government. With a highly fractured Legislative, getting enough votes to form a majority coalition is a herculean task that took Rajoy several months to manage following the last election.

During this period of time, there would be a lot of uncertainty, and that always looks bad for markets. Especially given the other negative political signs from Italy, it could contribute to a knock-on effect that would lead to capital flight and the ECB putting on hold their plan to bring an end to their accommodative stance.

Which brings us the final option: that Rajoy wins the no-confidence vote, does not call for elections, and is immediately again challenged, this time by Podemos. Pablo Iglesias, the leader of Podemos, has promised to appoint a non-political candidate to replace Rajoy, who would immediately call for elections. The idea is to bring members of Ciudadanos over to support the vote.

However, the divisionism among the members of Congress could – or would likely – lead to this as yet unnamed non-political candidate to find it impossible to form a government for several months, delaying the promised election – or, ultimately, taking power as a last resort in order to avoid political chaos. Thus, Spain would be lead by a non-politician for an indeterminate amount of time, with no clarity as to what his policies or platform would be.

Uncertainty remains the name of the game, likely to keep the Euro under pressure for the short term.

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