Spain’s borrowing costs edged away from three-month highs on Thursday ahead of Spanish lawmakers’ vote on acting Prime Minister Mariano Rajoy’s bid to form a minority government to end 10 months of political deadlock. Rajoy is expected to win the vote in two rounds. He has offered to work with his opponents on major challenges such as pension and education reforms and is unlikely to get the backing from an absolute majority of deputies he requires on Thursday.
But if he fails, a second vote would be called 48 hours later in which he simply needs more votes in favour than against, meaning the recent decision by opposition Socialists to abstain should allow for a breakthrough.
His conservative People’s Party (PP) won two elections in December and June but failed to secure a majority and attempts to put together a viable coalition government have failed.
“While acting PM Rajoy is likely to miss the absolute majority today he has good chances to succeed in the second round,” DZ Bank strategist Pascal Segesser said.
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Spanish 10-year bond yields dipped 1 basis point on Thursday to 1.13 percent, just off a three-month high of 1.16 percent struck 10 days ago, according to Tradeweb.
Most other euro zone yields were slightly lower on the day, including German 10-year yields – the bloc’s benchmark – which struck a four-month peak of 0.11 percent in Asian trading hours.
Even if Rajoy is successful, analysts fear that strained relationships between his People’s Party and the Socialist Party (PSOE) could hamper reform efforts in the euro zone’s fourth largest economy, which is recovering from a severe recession.
“PP and PSOE have virtually no history of coalition government, let alone grand coalitions, and will struggle to work constructively,” political risk consultancy Eurasia Group analyst, Federico Santi, said.
“They also share little in the way of ideology and have fundamentally different positions on many issues the next government will have to face, from fiscal policy, to labour regulation and education.”
Spain is also under pressure to present a new budget plan for 2017 to Brussels to guarantee it can meet public deficit targets for next year, and Rajoy said on Wednesday his government planned to present a proposal in the coming days.
Spain’s main stock market, which opened a touch lower, has fallen nearly 4 percent this year, outperforming slightly the euro-wide STOXX 600 which has lost about 6.5 percent of its value.