Will Spanish politics surprise markets? Barclays asks

Spain faces idiosyncratic risks over the coming months arising from the country's current political situation, with a minority government in Madrid facing tougher opposition and Catalan nationalists likely to call snap elections by the first quarter of 2018, at the latest, Barclays says.

Nonetheless, neither of those two scenarios was likely to derail the country's economy nor the outlook for Spanish assets, the investment bank said.

A victory for Pedro Sanchez in the Spanish Socialist party's primaries on 21 May might see somewhat of a sell-off, Apolline Menut and Antonio Garcia Pascual said in a note sent to clients.

But regardless of whether the more left-learning Sanchez or Susana Diaz won, the result would not not radically alter the political risks that lay ahead, the life expectancy of the current centre-right government nor the likelihood of 'snap elections', Barclays said.

"This is why we think that if there is a significant sell-off in Spanish assets, it could be an opportunity to 'buy-the-dip', especially given Spain’s macro outlook is fairly strong and we expect it to continue for the next few quarters," they said.

In any case, regardless of who came out on top from the Socialist primaries, snap elections were unlikely in 2017 or 2018, Barclays said.

"The key factor to early elections is the evolution of the polls, in our view," the economists said and those still pointed to a comfortable lead for the centre-right PP.

As regards Catalonia, the regional government was likely to call in June for an independence referendum, leading Madrid to prosecute in the courts.

So a referendum vote was unlikely in the near-term.

However, such a chain of event would likely see snap elections called in Barcelona, by the first quarter of 2018 at the latest.

Given how polls were pointing to a clear predominance of pro-independence parties in the parliament, that was the most likely end-game, according to Barclays.

"As a result, we would expect Catalonia to make headlines in the coming months, although we see risks of a shock outcome as moderately low."