Spain - Political Risk Update

7/18/2019 Spain - Political Risk Update

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May 2015

Spain: Political Risk

Afi’s dedicated website for Research on Spain (www.afi.es/ros)

http://www.afi.es/ros

http://www.afi.es/ros



2

Index

1. Recent developments

Spanish governments since the transition

Evolution of political environment since last general elections

2. Timeline and procedures

Timeline of European and Spanish elections in 2015

Spain’s electoral system

Process of government formation

3. Regional and municipal elections

Importance of regional elections

Projections and regions to watch

Scenarios for pact-formation following regional elections

4. National elections and policy implications

Evolution of latest polls

Movement of votes between parties and factors influencing final outcome

Scenarios for pact-formation after national elections

5. Catalonia & independence

Evolution of independence sentiment and latest polls

Roadmap of pro-independence parties



3

Key Points (1/2)

Regional elections on 24 May in 13 of Spain’s 17 regions and municipal elections across all of Spain

are a staging point ahead of general elections at the end of 2015.

Regional elections are important because: (i) regions control 35% of expenditure and are vital for

implementation of national policy, (ii) the distribution of votes in regional elections may provide an

indication of how voters will approach national elections and (iii) the need to form governing pacts may

force parties to reveals their cards ahead of general elections.

Latest opinion polls for regional elections point to a significant increase in fragmentation compared

to 2011. In 2011, the PP won absolute majorities in eight regions and was the senior party in two other

regional governments. Latest surveys indicate that the PP could be the most voted party in nine regions butonly has a realistic possibility of an absolute majority in Castilla y León.

A wide range of coalition scenarios are feasible. In the absence of bilateral pacts between PP and PSOE(theoretically possible in most regions), Ciudadanos, Podemos and regional parties could play a significantrole in government formation.

The key question is whether national parties are willing to reveal their preferences regarding preferredcoalition partners ahead of general elections so as to govern at the regional level. We see three scenarios:(1) abstention until general elections, (2) strategic pacts dictated by national party leaders, (3) non-

strategic pacts depending on regional arithmetic and interests.



4

Key Points (2/2)

The latest national polls point to a degree of stabilisation in vote intention ahead of general elections.

PP and PSOE vote is recovering slightly, support for Podemos is starting to fade, meanwhile Ciudadanoscontinues to consolidate its recent gains. The rise of Ciudadanos and the softening of Podemos’ left-

wing rhetoric has shifted the debate towards the centre.

Recent developments in Greece and the surprise Conservative victory in the UK provide a boost to thePP, while the strengthening economic recovery also provides tailwinds to the current government. However,Spain-specific factors such as ongoing corruption scandals and the ability of new parties to positivelyinfluence the agenda in post-regional election pacts could undermine support for traditional parties.

We envisage three possible outcomes following national elections: (a) formal coalition between centreparties – a market positive outcome that could generate consensus around still needed reforms, (b)

minority government reliant on ad hoc support – neutral or slightly negative, (c) a coalition of the left –

market negative given the potential influence of far-left parties and the risk of reform rollback.

New parties could play a crucial role in injecting new life into the policy position of the next Spanishgovernment. There is potential for a new consensus to emerge around reforming regional finances

(especially, harmonising tax powers), measures to reduce corruption and reform of electoral

institutions, as well as some simplification of individual debt restructuring procedures.



Recent developments

1

5


http://slidepdf.com/reader/full/spain-political-risk-update 6/33 6Source: Afi.

Since the Transition, Spanish politics have been dominated by two parties. Sevenout of eleven governments were minority governments.

Factors contributing to stability:

Motion of no confidence (art.113 ofSpanish Constitution) – requires votein favour of alternative governingproposal

Role of nationalist parties:nationalist parties have propped upminority governments in return forconcessions

Experience at regional level:

governments at regional level haveseen coalitions of all colours e.g. PP-IU in Extramadura


http://slidepdf.com/reader/full/spain-political-risk-update 7/337Source: Afi, various opinion polls.

However, EP elections in May 2014 marked a sharp drop in support for the two mainparties, which has been sustained in recent opinion polls.

Vote in European Parliament elections in

2009 and 2014

-2.5m

-2.5m

Percentage share of vote of two main

parties, average of monthly opinion polls


http://slidepdf.com/reader/full/spain-political-risk-update 8/338Source: Afi, various opinion polls, CIS.

Top three problems cited by Spanish public

Displacement of votes first towards Podemos and, more recently, Ciudadanos. Theprincipal drivers are the economic crisis and corruption.

Estimated vote in general elections

(monthly average of polls, %)



Timeline and procedures

2

9



10Source: Afi.

2015 a year of elections in Spain. Regional and municipal elections in May thefirst test of new political environment.

• Elections in Andalucía22 March

• Municipal elections (all Spain)• Regional elections (all regions except for Galicia, Basque Country, Catalonia and Andalucía)

24 May

• Plebiscitary elections in Catalonia27

September

• General elections in PortugalSeptember-

October

• General elections in PolandOctober

• General elections in SpainNovember -December



Spanish election mechanics(general election)

11

There are 350 seats in the Spanish Parliament.

Seats are distributed across Spain’s 50

provinces, plus Ceuta and Melilla as follows:

Each province is assigned a minimum of 2seats (2 x 50)

Ceuta and Melilla are assigned one seateach (1 +1)

The remaining seats (248) are distributedproportionally across provinces accordingto the population in each province

For the 2011 general elections, seats wereassigned across provinces as set out in the table.

The distribution of seats may vary according tochanges over time in the proportion of populationliving in each province.

Number of

seats

Provinces

36 Madrid

31 Barcelona

16 Valencia

12 Alicante, Seville

10 Málaga, Murcia

8 Cádiz, Biscay, La Coruña, Balearics, LasPalmas, Asturias

7 Tenerife, Zaragoza, Pontevedra, Granada

6 Tarragona, Córdoba, Gerona, Guipúzcoa,Toledo, Almería, Badajoz, Jaen

5 Navarra, Castellón, Cantabria, Valladolid,Ciudad Real, Huelva, León

4 Lérida, Cáceres, Albacete, Burgos, Salamanca,Lugo, Orense, La Rioja, Álava

3 Guadalajara, Huesca, Cuenca, Zamora, Ávila,Palencia, Segovia, Teruel

2 Soria

1 Ceuta, Melilla

Source: Afi.



Distribution of seats according to vote

12

Seats are assigned according to the D’Hondt method (highest averages) on the basis of closed party lists (party selects orderof election of candidates).

This approach is used other countries, including Brazil, Denmark, Japan, Netherlands and Portugal. To be included in the distribution of seats, parties must receive at least 3% of the valid vote (including blank votes).

Example: Valencia (elections 2011)

Valencia had 16 seats assigned to it in the 2011 elections (2 seats plus proportional share of remaining 248) Under the D´Hondt method, the total votes are divided by 1, 2, 3, etc. up to the number of seats to be allocated (16). The 16 seats are then allocated according to the highest ratio of votes to seat (marked in green). PP were allocated 9 seats, PSOE gained 4 seats and EUPV, Compromis-Q and UPyD were assigned one seat each.

PP PSOE EUPV-EV COMPROMIS-Q UPyD PACMA Eb ERPV OthersVotes 743,604 370,499 96,417 85,797 84,394 6,381 3,972 3,648 14,159

Share 52.2% 26.0% 6.8% 6.0% 5.9% 0.4% 0.3% 0.3% 1.0%

1 743,604 370,499 96,417 85,797 84,394 6,381 3,972 3,648 14,159

2 371,802 185,250 48,209 42,899 42,197 3,191 1,986 1,824 7,080

3 247,868 123,500 32,139 28,599 28,131 2,127 1,324 1,216 4,720

4 185,901 92,625 24,104 21,449 21,099 1,595 993 912 3,540

5 148,721 74,100 19,283 17,159 16,879 1,276 794 730 2,832 6 123,934 61,750 16,070 14,300 14,066 1,064 662 608 2,360

7 106,229 52,928 13,774 12,257 12,056 912 567 521 2,023

8 92,951 46,312 12,052 10,725 10,549 798 497 456 1,770

9 82,623 41,167 10,713 9,533 9,377 709 441 405 1,573

2

1 3

4

5

6

7

8

9

10

12

11

13

14 15

16

F a c t o r o

f d i v i s i o n

Source: Afi.



Consequences of Spanish electoral system

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The distribution of seats tends to favour rural and low populated areas. E.g. in the 2011 elections, 16,066 votes were required toobtain a seat in sparcely-population Soria, while in Madrid 86,839 votes were necessary.

The system favours majority parties (over-assigns seats relative to proportion of votes). Parties can secure more seats by

having a concentration of the vote in a small number of (relatively populous) regions, instead of widely dispersed. This has

created a bias in favour of nationalist parties.

The smaller the district, the bigger the advantage for majority parties

Party Share of

votes

Share of

seats

PP 44.6% 53.1% (186)

PSOE 28.8% 31.4% (110)

CiU 4.2% 4.6% (16)

IU-LV 6.9% 3.1% (11)

Amaiur 1.4% 2% (7)

UPyD 4.7% 1.4% (5)

PNV 1.3% 1.4% (5)

ERC 1.1% 0.9% (3)

BNG 0.8% 0.6% (2)

CC 0.6% 0.6% (2)

Compromis 0.5% 0.3% (1)

FAC 0.4% 0.3% (1)

GBAI 0.2% 0.3% (1)

6 of Amaiur’s 7 seatswere a result of achieving24.1% of the vote in theBasque Country

All of CiU’s seatswere a result ofachieving 29.1% of

the vote in Catalonia

Source: Afi.



14Source: Afi.

Government formation procedure takes a maximum of two months. Most votedparty usually given first attempt at government formation.

Article 99. Spanish ConstitutionBroadly similar process for formation of regional governments



Regional and municipal elections

3

15



16Source: Afi.

Elections in Andalucía on 27 March. PSOE retain dominance, Ciudadanos andPodemos receive close to 1 million votes. Difficulties to form government.

Distribution of vote in 2012 and 2015 Andalucía elections Distribution of seats in 2012 and 2015 Andalucía elections

20122015

PSOE’s success in Andalucian elections unlikely to be replicable elsewhere due to PSOE historic dominance in region, personalpopularity of Andalucián leader Díaz and lack of preparation time, which reduced new parties’ preparedness.

Formation of PSOE minority government blocked by PP, Podemos, Ciudadanos and Izquierda Unida: Three failed attempts toapprove PSOE led-minority government. PP and IU refusal to negotiate. Podemos (reduction in senior civil servants, break in relationswith banks responsible for evictions) and Ciudadanos (signing of anti-corruption pact, electoral reform, reduction in fiscal pressure)only willing to offer support in return for specific demands.

If no agreement reached by 5 July, new elections will be called.



17Source: Afi.

Regional and municipal elections will provideinsights into post-general election scenarios

Most voted party in 2011 regional elections

Governing coalitions following 2011 elections

Main results of 2011 regional elections:

PP most voted party in 11 of 13 regions voting: only Asturiasand Navarra voted more for other parties.

PP absolute majority government in 8 of 13 regions: PP-ledcoalition also in Extremadura and Aragón. Canary Islands,Navarra and Asturias only regions not governed by PP (excluding Andalucía, Catalonia and Basque Country on different electioncycle)

Importance of 2015 regional elections:

Impact on governance and reform implementation: regionsaccount for 34% of total government spending (including health &education). Regional support is crucial for implementation ofnational government reform and consolidation objectives.

First test of vote intention at ballot box: first wide-scale votesince EP elections. Will provide an indication of how votes might

be distributed at national level but affected by regionalidiosyncrasies (e.g. as was case in Andalucian elections).

Insights into pact scenarios: government formation processfollowing regional elections may provide insights as to possiblepacts that might be agreed at the national level.



18Source: Afi, CIS.

2011

Most

voted

party

PP

absolute

majority

PSOE

absolute

majority

PP + CsPP + C +

regional

PP +

regional

PP

+PSOE

PSOE +

POD

PSOE +

Cs

PSOE + POD

+ Cs (* + IU)

PSOE +

POD +

regional

PSOE +

Cs +

Regional

POD +

regional

Madrid PP PP X X X*Valencia PP PP X X X X

Castilla-León PP PP X

Extremadura PP + IU PSOE X X

Murcia PP PP X X X

Cantabria PP PP X X

Aragón PP + PAR PP X X X

CLM PP PP X X X X

Balearics PP PP X X X X

Canaries PSOE+CC PSOE X X X X X X

Navarra UPN + PSOE UPN ?

La Rioja PP PP X X X

Asturias FORO PSOE X X X X X

Viable options 1 5 4 11 2 1 9 3 2 1

* PP and Podemos coalition/pact discounted. In some regions we discount more complex coalition options, if easier and more feasible coalition options are available.

Surveys point to need for pacts (coalitions or minority governments)Possible government formation options according to CIS opinion poll non-exhaustive*

PP expected to be most voted party in 9 out of 13 regions, but to retain absolute majority only in Castilla y León (possibly Murcia)Coalition/pact between traditional parties (PP & PSOE) is an available option in all but one region (Navarre)

Ciudadanos a necessary (but not always sufficient) coalition partner for PP in up to 9 regions

PSOE reliant on broad left-wing coalitions (Podemos + others) to govern in most regions, except Castilla-La Mancha

Regional parties play a key role in Navarra, Canary Islands, Cantabria and to a lesser extent Valencia & Asturias



19Source: Afi, CIS.

Key regions to watch will be Madrid and Valencia (economically important, PPheartlands) with possible changes in colour of government in various regions

20112015

2015 2011

Madrid

PP heartland: largeincentive to pact

19.3% of GDP and14% of population

Traditional partiestarnished by corruption

Valencia

PP heartland

9.7% of GDP and 11%of population

PP tarnished bycorruption

Not forgetting municipalities…

PP on track to hold large cities: PP neck-and-neck with Podemos in Madrid, CiU lead

reduced in Barcelona

Intermediate cities (provincial capitals) a keybattleground

Risk to PP hegemony

Relatively safe for PP: Castilla y León, Murcia Moderate risk to PP: Madrid, Valencia, Cantabria, Rioja High risk to PP: Áragon, Extremadura, CLM, Navarra

Wild cards (no clear outcome)

Navarra, Aragón



20Source: Afi.

Three possible scenarios for pacts following regional elections. Trade-off betweenobtaining power at regional level and revealing cards ahead of national elections.

1. Abstention / tacit agreements until general elections

Parties prefer not to reveal cards ahead of general elections Tacit support (abstention) given to most voted party until general elections Risk of periods of paralysis in some regions (as is case in Andalucía) affecting short-term fiscal consolidation Limited read-across to general elections

2. Pacts/coalitions determined by party leaders

Pacts and coalitions determined by national leaders based on strategic considerations. Traditional parties evaluate whether willing to work with new parties in order to main control in some regions (PP

with Ciudadanos? PSOE with left wing coalitions?). PP-PSOE coalitions remain unlikely New parties (Ciudadanos, Podemos) attempt to avoid showing party bias by attaching “objective” conditionality to

support for other parties. Potentially significant read-across to post-general election scenarios

3. Pacts/coalitions determined by regional leaders Pacts and coalitions formed on ad hoc basis according to regional arithmetic and degree of independence/power

of regional leader vs. national leaders Possibility of opportunistic agreements Some read-across to post-general election scenarios but regional power dynamics influence outcomes



Scenarios for national elections

and policy implications4

21



22Source: Afi, various opinion polls.

Latest opinion polls point to some signs of stabilisation: PP and PSOE recovering,Podemos in freefall and Ciudadanos continuing to make inroads

PP and PSOE vote starting to stabilise with modest

signs of recovery…

Modest pick-up in support for PP, possibly related tostrengthening economic recovery

Change in fortunes for PSOE related to Andalucíavictory and problems for Podemos

Podemos vote falling sharply, reflecting severalfactors…

Failed attempt to capture centre-ground, resulting in awatering down of messages and distinctiveness

Internal disputes and destitution of founding member Negative read-across from Syriza victory in Greece Rise of Ciudadanos as alternative vehicle for protest

vote

Ciudadanos consolidates position as fourth party

Successful penetration of centre ground (capture ofdissatisfied PP voters)

Partial displacement of Podemos as “change” option

Evolution of estimated vote of main Spanish political

parties (%)



23Source: Afi, CIS, Metroscopia.

Podemos attracts voters from left and Ciudadanos from centre-right (PP, UPyD).Debate has shifted from left towards centre (anti-corruption, social democracy).

Left RightCentre

Self-assessment of political disposition of potential voters of each party

Vote intention according to vote recollection in 2011 elections

Podemosattracting former

PSOE & IU voters& disenfranchised

Over half of those planning tovote for Ciudadanos voted for

centre-right parties in 2011



24Source: Afi, CIS.

Translation of opinion polls (direct vote intention) into final votes remainsuncertain and will depend on several factors

Direct vote intention and estimated vote (%)



25Source: Afi.

Prospect of pact-based government not necessarily bad news for markets. Threepossible scenarios for government formation after the elections.

Formal coalition between centre parties (PP + Cs, PSOE +Cs, PP + PSOE)+ Policy/reform focussed coalition (possibility of coalition agreement)+ Consensus environment to address pending issues (e.g. regional model of finance,

Catalonia, political & institutional reform)+ Reduced influence of nationalist parties- Slower decision making process (finding consensus), increased fragility

Minority government with ad hoc support (PP+ or PSOE+)

+ Will create need for greater consensus building, avoids populist takeover by Podemos

+ Historically proven to be relatively stable (albeit at a price of minority interests)- Increased difficulty to pass necessary reforms/consolidation, risk of stagnation- Increased fragility of government

Left-wing coalition/alliance (PSOE + Podemos + IU)

+ PSOE to ensure centre-left focus i.e. no Syriza scenario+ Potential to offer solutions to social problems and corruption issues- Risk of reform rollback and challenge to fiscal consolidation- Possibility of anti-business measures due to Podemos and IU presence

Market

impact

Central

scenarios

Low-prob

scenarios

i. Absolute majority government surprise (e.g. UK elections): low likelihood due to corruption scandals facing PP &PSOE, weaker overall economic recovery and reduction in “fear scenarios” (e.g. Podemos led government)

ii. Populist government: reduction in support for Podemos and move towards centre mean low risksiii. Second round of elections



26Source: Afi.

Despite some progress in introducing reform, significant reforms will be neededin the next Parliament

Reduce private debt overhang

Eliminate structural deficit

Eliminate two-speed job market

Reform regional finances

Improve productive structure

New growth model

Speed up judicial proceedingsIntroduction of second opportunity law

Shift tax base from direct to indirect taxes & harmonisationUndertake Comprehensive Spending Review

Improve dispersion and predictability of financing system Address solidarity problems and consolidation incentives

Simplify number of contracts, reduce temporary contractsImprove active labour market policies

Product market reforms: professional services legislation,

business simplification, judicial processes

Creation of industrial strategy supportedby R&D and education reforms

Priority Areas Necessary reforms



27Source: Afi, party programmes.

Policy proposals of new parties, Ciudadanos and Podemos, likely to havebiggest impact on “business as usual” approach of traditional parties

Labour Market

Ciudadanos Podemos

• Elimination of temporary contracts• Dismissals costs linked to time in job• Portable social security rights

• Public spending to boost employment• Direct support plans instead of subsidies• Move towards 35 hour week

Fiscal policy • Reduction of income tax rates andelimination of deductions• Reduction of VAT, elimination of super-

reduced rate

• Increased progressiveness of taxes• Reduction in minimum exempt forinheritance tax

• Introduction of top rate luxury goods tax

Debt • Evaluation of state debt and restructuring ofdebt undertaken in bad faith

• Simplification of debt restructuringprocesses

• Mortgage debt limited to value of house

• Second opportunity law for individuals andself-employed

• Mortgage debt limited to value of house

Regions • Creation of federal system• Harmonisation of regional taxes

• Coordination of taxes across regions• Harmonization of minimum insertion income

across regions



28Source: Afi, party programmes.

Despite different economic philosophies – Ciudadanos more liberal, Podemosmore interventionist – some possible areas of consensus for new government

Productive model

Ciudadanos Podemos• Match funding for strategic sectors• Improve tax treatment for venture capital• Creation of technology network

• Increase R&D spend at regional level to 2%of GDP

• Focus on energy and transportinfrastructures

• Creation of public bank

Welfare state • Paralysis and reversal of privatisations• Right to access to electricity and gas• Paralysis of evictions

• Creation of Earned Income Tax Credit

Potential areas of consensus for next government

Anti-fraud and corruption measures Simplification of debt restructuring procedures Greater harmonisation of regional tax differences



Catalonia – Independence

5

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Scotlandreferendum onindependence

Mas calls off formalconsultation plans

9-N quasi-consultation

Mas announces plansfor early elections inSeptember

Support from independence has fallen from peak levels recorded last year, reflectedin a reduction in market concern (though Catalonia still pays a risk premium).

Catalan voter preference over status of Catalonia Spread Catalan government debt and SPGB

Public fatigue following consultation

Government refusal to negotiate

Infighting between pro-independence parties

Reasons for fall

in support for

independence

Source: Afi, CEO, Bloomberg.



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Early elections in Catalonia scheduled for 27 September (but not yet formallycalled). Polls suggest plans to turn vote into a de facto plebiscite on independencewould give pro-independence parties a slender majority of seats but not votes.

Estimated share of seats in Catalan regional electionsEstimated share of vote in Catalan regional elections

Possibility that Catalan leader, Mas, may reconsider decision to hold early elections on a plebiscitary basis – afinal decision will have to be taken in mid-August (40 days before election date)

Source: Afi, CEO.



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The timeline proposed by the pro-independence parties (ERC + CiU) would seea formal UDI in March 2017

27 September

Vote in favour of

independence inearly elections

March 2017

Referendum on

Catalan Constitution

Formal UDI

Key uncertainties

Threshold for a vote in favour of independence: absolute majority of votes / seats

Position of other parties in pro-independence camp (UDC, CUP, ICV) Legal validity of using regional elections as a plebiscite for independence Membership of EU/Eurozone

i. Symbolic UDI declaration in Catalan Parliament

ii. New Catalan Constitution to be drawn up (within 10 months)iii. Creation of Catalan state institutions (Treasury, social sec)

iv. Negotiations with Spain over division of assets

v. Discussions at international level for recognition as new State

Nov-Dec: new national government,possibility to open negotiations

Source: Afi.

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