Spain: Political Risk

December 2014

Afis dedicated website for Research on Spain (www.afi.es/ros)

Key points
Changing political landscape in Spain
Surveys point to further fragmentation of the political landscape ahead of next years elections, implying a more leftleaning Parliament, dominated by three parties: PP, PSOE and Podemos.

Podemos is following in the footsteps of Syriza and MS5 and faces similar challenges to consolidate its rise in the
polls. The outcome of the quickly unfolding Greek situation will also be key for the future of Podemos.
Besides the continuation of positive economic headlines, we see 3 key factors affecting the final outcome of next
general elections: (i) lasting impact of corruption scandals, (ii) perceived economic competence and (iii) extent of
abstention by PP voters

Catalonia

Opinion polls suggest a split in terms of support for independence amongst Catalans but a clear majority express a desire
for a change from the status quo.

The result of the 9N vote is subject to interpretation, but sufficient to give President Mas the momentum to set out his own
roadmap, which contemplates early elections within 6 months.

Opinion polls suggest pro-independence parties could obtain a narrow majority in early elections. CiU-ERC need to reach
agreement on format of early elections

Options for negotiation under legislature of current Spanish government are limited by Constitutional and political
considerations.

In all tail risk scenarios, retaining Euro membership is the key element affecting overall costs in any negotiation over
separation. In order to retain access to the Euro as a member of the Eurosystem, Catalonia would need to ensure EU
membership.

We identify 6 channels of impact for Spain in the case of Catalan independence, with the overall impact potentially being
quite negative in the short and medium term.
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Political fragmentation
- Latest opinions polls and implications for new Parliament
- Rise of Podemos
- Key factors in Q415 elections

A changing political landscape: surveys point to a transition from a bipolar

electoral system (PP-PSOE) to a tri-polar system (PP-PSOE-Podemos)
Votes in EP elections of 2009 & 2014 (million votes)

Regional elections in 13 of 17 regions (excl. Catalonia, Galicia,

Andaluca and Basque Country)
May 2015 Municipal elections
November Deadline for general elections at national level
2015

Deadline for elections in Catalonia

November Risk of early elections being called in Q115
2016

Estimated vote intention: CIS (% of total)

Source: Afi, CIS, Metroscopia

Estimated vote intention: Metroscopia (% of total)

implying a more left-leaning Parliament, but also the need for coalitions in the
absence of stable minority government options

PSOE the
kingmaker?

Left

Right

Other

PP to look to
strengthen
its social
policy
credentials?

Source: Afi, CIS, Vanguardia

Podemos is following in the footsteps of Syriza and MS5 and faces similar
challenges to consolidate its rise in the polls
Determining factors in success of peripheral populist parties:

Compatible?

Source: Afi, opinion polls

M5S

A minimum common denominator

Evolution of vote according to polls: Syriza, Podemos, 5SM

Syriza

Organisational capacity (at all levels) beyond personal charisma of leader

Centrality of programme attracting mainstream voters without diluting the clarity of original messages
Ability to react of traditional parties (e.g. Renzi), fight for the centre-left
Reaction of centre right voters: abstention? alternatives (Golden Dawn / Northern League)?
Treatment of majorities in electoral system (e.g. existence of majority premia)
Podemos

Anti-elitist (caste)

Pro-Euro

Anti-austerity

Debt renegotiation

Increase fiscal pressure

(fraud, taxes on rich)

Renationalisation

Increase in minimum wages,

more social support

Anti-immigration

?
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Key factors affecting final outcome: (i) lasting impact of

corruption scandals, (ii) perceived economic competence and
(iii) extent of abstention by PP voters

Direct vote intention (%)

Flows of votes between Spanish political parties (millions)

Party with most realistic programme

capable of addressing crisis (%)

Source: Metroscopia, CIS, Llorrente y Cuenca

Three main problems in Spain (%)

Catalonia
- Origins of the current situation and support for independence
- 9N vote
- Mas roadmap to independence
- Polls on early elections
- Tail risks
- Market reaction to date

Origins of the current situation

Pro-independence sentiment in Catalonia
is latent and longstanding and has its
history in the absorption of Catalonia into the
Spanish state.
Recent resurgence can be linked to the
Constitutional Court decision in 2010 to
strike down key elements of the Catalan
Statute which was designed to find a legal
expression of Catalonia within Spain.
The failure to introduce meaningful
reform of the regional financing system to
address long-standing Catalan perception of
subsiding the rest of Spain has further
fuelled nationalist sentiment.
The economic crisis particularly affected
the Catalan economy and public finances
and fomented further the desire for
disassociation with the rest of Spain.

An apparent lack of openness to dialogue

and a hard nosed attitude to (procentralising) reform by the government may
also have further fuelled sentiment.

Factors driving pro-independence sentiment in Catalonia

Growing strength of
far left Republican
ERC in Catalonia
Collapse of PSOE
vote, weakness of
monarchy

Historical
factors
Weakness
of moderate
voices

Factors
influencing
nationalist
sentiment in
Catalonia

Hard line attitude of

current government
on dialogue
Centralisation focus
of reforms e.g.
Education reform,
Single Market Law

Catalan
Statute
2007/2010

Regional
financing
model

Government
programme

Increased vulnerability of
Catalan public finances and
dependence on state e.g. FLA,
Providers Fund

Growing public resonance of

historical events
e.g. Catalan National Day

Economic &
Institutional
Crisis

Failure to reach an
agreement with central
government on key elements
Key sections reinterpreted /
struck down by
Constitutional Court in 2010

Longstanding perception of
subsidising rest of Spain

Perceived under
investment by state in
Catalonia

Rising unemployment and tainting of

Spanish brand by corruption
scandals

The weakness of potential moderating

voices (PSOE, Monarchy) have provided
little offset to rising far left republicans, ERC.

Opinion polls suggest a split in terms of support for independence amongst Catalans
but a clear majority express a desire for a change from the status quo
Metroscopia: If a referendum in Catalonia were to include the
option of a Third Way, how would you vote?

Source: Afi, Metroscopia, CEO.

CEO: Catalan voter preference over status of Catalonia (%)

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9 November vote: a result open to interpretation

Latest CEO survey (October)
Do you want Catalonia to
become a State?
If yes, do you want that
state to be independent?

2.3m participants

9-N (% of participants)

Source: Afi, CEO, Reuters

of 6.2m potential
voters

9-N (% of eligible)

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but sufficient to give Mas the momentum to set out his own roadmap

Differences with ERC:

i. ERC no joint platform before early elections, formation of pro-independence coalition ex-post
ii. Single vote on independence with immediate UDI

Source: Afi

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Opinion polls suggest pro-independence parties could obtain a narrow majority in

early elections. CiU-ERC need to reach agreement on format of early elections.
Current and projected Catalan Parliament by support for independence

Breakdown of share of vote, average of post 9-N surveys

Pro-independence parties

Breakdown of Catalan Parliament (vote on a unitary basis)

Source: Afi, Vanguardia, GESOP.

Breakdown of Catalan Parliament (vote on a joint platform basis)

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Options for negotiation under legislature of current Spanish government are

limited by Constitutional and political considerations
Likelihood of agreement

Impact on independence debate

1. Easing of financing costs

FLA and FFPP conditions have already been improved

Can be sold by government within framework of generalised
improvement in conditions for all regions

Minimal may provide some additional breathing

space to existing Catalan government

2. Infrastructure sweeteners

Would enable government to provide direct response to some of Mas

23 proposals
Could be presented within wider Juncker plan e.g. energy
interconnection with France

Modest would allow national government to counter

arguments of under investment in region, and provide
a concrete win for Mas. But would not resolve
underlying dynamics.

3. Reform of regional financing

model

Postponed by government until 2016, but could form part of postelections agreement
Impossible to negotiate bilaterally: other regions have a stake
Insufficient funds to offer Basque-style model
Fundamental changes require Constitutional reform

Significant an opportunity to address longstanding

bone of contention in Catalonia but no longer likely to
be sufficient without devolution of competences

4. Devolution of additional
competences e.g. education

Would probably require Constitutional reform (dissolution of

Parliament)
Anathema for large segments of PP party

Significant together with reform of financing model,

could be sufficient to allay current tensions. But could
lead to longer-term fragmentation of Spanish society.

5. Federal model

May provide a more structured alternative to keep Spains regions

together
Would require major Constitutional reform (dissolution of Parliament)
and reopening transition consensus

Very significant depending on exact design, may

provide a longer lasting solution to anti-centrifugal
forces in Spain

6. Legal referendum

Would require Constitutional reform

Unthinkable for Spains main parties

Uncertain would address current frustrations but a

narrow result (either way) could further raise tensions

Source: Afi

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Independence is a tail risk, but its impact would be large specially for Spain

Source: Afi

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To date markets have been watchful but have not overreacted. Dependence on state
finance the key factor under review by ratings agencies.
Sources of finances for Catalan government (% of total)

Spread Catalan government debt and SPGB (bps)

Forecasts
11%

5%

Mas calls off formal

consultation

35%

9-N
Vote in favour of
independence in
Scotland

55%

4%
11%

19%

4%
7%
18%

21%

11%

Rest of World

Source: Afi, Reuters, Bank of Spain

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Afi - Advisory on Spain services

Macro risk

Political risk

Macroeconomics

Institutional 1

Sector analysis

Political Outlook 2

(RE, Energy, Consumer)

Banking sector

Geopolitics 3

Public finance

(1) Territorial cohesion (Catalonia, etc.), Constitutional reform and institutional architecture, State-Regions funding model, etc.
(2) Political stability and capacity to reform, poll & survey analysis, rise of extremist and/or populist options, etc.
(3) Implications for Spain of external developments in world-wide geopolitics (focus on Europe)

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Afi - Advisory on Spain services

Dedicated website for Research on Spain (www.afi.es/ros)

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