Spain: Government Formation Will End Deadlock Amid Political Turmoil, Credit Fundamentals Unlikely to Materially Change

After a few months of political stalemate, the Kingdom of Spain (rated “A”, Stable, by DBRS Morningstar) will have a fully functioning government. On November 16, 2023, Pedro Sánchez was re-elected as Prime Minister by the Spanish Congress and will likely lead a coalition government of the centre-left Partido Socialista Obrero Español (PSOE) and left Sumar parties. Pedro Sánchez obtained 179 votes out of 350 in the Spanish Congress with support from pro-independence Catalan parties (Esquerra Republicana de Catalunya (ERC) and Junts per Catalunya) and other regional parties.

Key Highlights
-- While fiscal pressures could increase during this legislature, DBRS Morningstar considers the fiscal risks will be limited by the re-activation of EU fiscal rules —either old or new— and the previous government's track-record of gradually implementing responsible fiscal policy.
-- DBRS Morningstar views positively the formation of a Spanish government with a mandate to continue advancing on its Recovery Plan.
-- While the potential implications from the amnesty law remain unclear, DBRS Morningstar considers that Spain's institutional checks and balances mitigate concerns over rule of law.
-- DBRS Morningstar, in principle, does not expect any direct implications for Spain's credit rating from a potential debt relief to be provided to the regions by the central government.

“Pedro Sánchez will face the complex task of reducing Spain's fiscal deficit, while honouring the various political agreements that led to his investiture, especially as cyclical headwinds are fading,” said Javier Rouillet, Vice President of the Sovereign Group at DBRS Morningstar. “We consider the fiscal risks will be limited by the re-activation of EU fiscal rules and the previous government's track-record of gradually implementing responsible fiscal policy. The 2024 budget law will likely set the tone,” added Javier Rouillet.