Socialist Pedro Sánchez became prime minister of Spain after winning a no-confidence vote against conservative incumbent Mariano Rajoy, but the new minority government will struggle to muster parliamentary support and could be forced to call elections soon.
Rajoy's 6.5 years in office came to an end as 180 members of the lower chamber Congress of Deputies backed a motion brought by the Socialists after former senior officials from Rajoy's People's Party were found to have been operating a slush fund. Sánchez, who is not a member of parliament, will now lead a government with the support of 84 Socialist deputies in a chamber of 350, with two years before elections must be called. The People's Party has 134 seats, and controls a majority in the Senate.
"Spain seems to be heading toward early elections, probably before year-end, thus prolonging the stalemate that has impeded the approval of further structural reforms and budgetary consolidation," UBS analyst Roberto Scholtes Ruiz said in a note. "We expect the heterogeneous set of parties that have briefly joined forces to topple Rajoy to focus on some symbolic social and political initiatives, not being able to agree on fiscal measures that would materially increase the deficit."
Rajoy, who has overseen a European bailout of Spain's banking system, made it easier to hire and fire workers and lowered corporate tax rates, was removed by what could prove a fleeting coalition of the Socialists with the far-left Podemos and nationalists from the Basque Country and Catalonia. Sánchez has promised to start a dialogue with Catalan nationalists, who tried to secede from Spain last year, prompting the suspension of regional government and the arrest of prominent local politicians.
"Lack of agreement with leftist Podemos and nationalist parties on more relevant economic policies and the Catalonian crisis could probably force new PM Sánchez to call snap elections," Scholtes Ruiz said, noting that this could come as a relief to markets if it were to lead to the formation of a more stable government that included the centrist Citizens party, which now leads opinion polls.
Sánchez has already committed to keeping the People's Party's recently approved national budget, TD Securities said in a research note.
"It's likely that we could see a new government in power by the end of this year," TD Securities said, adding that a government led by Citizens could "provide political stability and help the country pass more ambitious fiscal policies."
Spain's Ibex-35 Index gained 1.9% at 11:49 a.m. local time, in line with advances in other European markets, which have been cheered by the approval of a new Italian government. The yield on Spain's 10-year sovereign bonds fell 7 basis points to 1.434%.
