Sanchez wins Spanish election as left pushes back against far-right Vox

The Spanish Socialist Party (PSOE) led by Pedro Sánchez is set to remain in power after coming away with the most seats in Congress at Sunday’s general election.

But Sanchez will need to ally with other left-leaning parties if he wants to clinch an absolute majority and may need the help of Catalan separatists in order to govern.

Far-left Podemos could add another 43 seats to Sanchez's 123 seats - which were up from only 85 in 2016 - and the Basque Nationalists, who would likely support Sánchez, had another six, leaving the Socialists just four seats shy from the absolute majority needed to form a government at the first attempt.

Failing that, he could still do so in a second vote as long as the main Catalan nationalist party, ERC, abstains.

Another option for PSOE was to ally themselves with Ciudadanos, which would garner them 180 seats, but such a coalition could prove problematic given their differences on certain core issues, their rivalry in regions such as Andalucia and Catalonia, especially in the former, and the fact that both parties' leaders had already ruled out such a scenario.

According to remarks attributed to Narciso Michavila at pollster GAD 3, a coalition between PSOE and Podemos could see the former lose some of the voters that it had managed to attract away from its far-left rival.

Coalition talks may yet take at least a month to conclude, given that European, local and regional elections still lay ahead, on 26 May.

To take note of, local and regional government spending accounts for the bulk of public sector outlays in Spain, hence the importance of those elections, both for the economy and the various political parties.

“The Socialists have won the general election,” Sanchez said as he addressed supporters at his party's headquarters in Madrid.

“Social democracy has a great future because it has a great present and Spain is an example of that. We will form a pro-European government to strengthen and not weaken Europe,” he added.

At 75.75%, voter turnout on Sunday was nine percentage points more than at the last general elections.

For many observers, the high voter turnout was a reaction by centre and left-wing voters to the rise in popularity of the far-right Vox party which obtained 24 seats in Congress, versus none in the latest elections.

Nevertheless, that was a weaker showing than some observers had been expecting. Ciudadanos, a more centrist conservative party, also performed very well when compared to the last general elections and almost surpassed the PP in the number of seats that it won in Congress (57 against 66, respectively).

The centre-right PP on the other hand lost about half of its seats, with its strategy of trying to compete with VOX having likely backfired.

Hence too, in part, Ciudadanos leader Albert Rivera's decision to rule out supporting Sanchez to focus instead on becoming the dominant force in the centre and on the right of the political spectrum .

“We will keep a close eye on the government of (Socialist Pedro) Sanchez and Podemos [...] We are now heading the opposition,” Albert Rivera told supporters in Madrid.

Undaunted, the PP's Casado laid claim to his party's traditional role as the main opposition in Parliament.

In a tweet posted after the results were made known, Casado said the party would “head the opposition responsibly (and) improve on the things we didn’t do well.”

THE MARKETS' REACTION

Spain's top flight Ibex 35 dropped around half a percentage point first thing on Monday morning. Nevertheless, one should note that typically, and regardless of the result, the index usually falls on the Monday following a general election.

Analysts' reactions were mixed.

"A very strong outperformance of far left Unidos Podemos -- proponent of a more unorthodox macroeconomic programme -- would have caused a significant concern among investors, in our view, but it did not materialize (UP reached 14% of the vote). On the other side of the political spectrum, there was much uncertainty about the performance of far-right VOX, but this party performed broadly in line with recent polls, with just over 10% of the vote," said Antonio Garcia Pascual at Barclays Research.

"Overall we expect that political uncertainty will persist for several weeks, if not months, amid attempts to form a coalition and decide its political and economic programme. For now, the silver lining for Spain continues to be growth."

Morgan Stanley agreed regarding the outlook for Spanish growth - up to an extent.

"Some fiscal boost this year also provides extra fuel to the domestic recovery,and we think that there's a low bar for growth to average ~2%Y over the next two years," Morgan Stanley's Joao Almedia said in a research note sent to clients.

"While this might be more than enough for markets to feel comfortable at this stage about the Spanish economic outlook, for the positive rating cycle to continue we think it's important that the reform momentum picks up again."

For his part, CMC Markets UK's Michael Hewson said: "While falling short of a majority there is a concern that any alliance that Sanchez is able to cobble together might come with an element of an anti-business bias. Any electoral alliance is still some way off given the proximity of European elections, however it is a new factor that investors will have to weigh up when looking to invest in European markets."