Spanish election result 'credit negative', says Moody's

Spain's inconclusive parliamentary election has increased political uncertainty and raised doubts about the future government's ability and willingness to continue with structural reforms and fiscal consolidation, according to Moody’s.

The ratings agency currently maintains Spanish bond ratings at Baa2 with a positive outlook, but deems the political upheaval to be ‘credit negative’. In a note to clients following close of the Spanish market late on Monday, Moody’s said the uncertain outcome of Sunday's elections illustrates its concerns over the government's commitment to its ongoing reform efforts.

The election result delivered a significant change from the post-Franco PP-PSOE political duopoly and from four years of PP majority government. It also confirmed the position of regional nationalist parties which support demands for a greater devolution of responsibilities from the central government to the regions.

Forming a new government is likely to be difficult in the event of a hung parliament and a failure to do so would lead to a new round of elections and a prolonged phase of political uncertainty.

Dietmar Hornung, associate managing director at Moody’s, said, “The election outcome is credit negative for Spain. It ushers in a period of uncertainty that is likely to persist for several weeks. More generally, it creates an element of uncertainty around Spain's continued structural reforms and fiscal consolidation."

Notwithstanding significant progress made, recent years have also seen a sequence of missed fiscal targets, the future likelihood of which will only be increased by an uncertain electoral result.

Spain's credit metrics - including GDP growth expected to peak at 3.2% in 2015, one of the strongest in the Eurozone this year, and the maintenance of current account surpluses - reflect the government's efforts to address the key imbalances in the economy.

The outcome of the forthcoming negotiations will inform Moody's assessment of the Spanish government's creditworthiness and the resolution of the positive outlook, the agency noted.