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Spanish banks seen under pressure from domestic politics, Italian instability

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Spanish banks seen under pressure from domestic politics, Italian instability

An expected vote of no confidence in Spain's Prime Minister on June 1 may cause banks to tighten up their lending on fears of political instability, according to analysts. However, uncertainty over the political situation in Italy is more likely to weigh on bank share prices.

Shares in Spanish banks fell sharply in late trading on May 31 as the likelihood of a change in government grew after the Basque Nationalist Party said it would support the motion.

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Prices began dropping May 24 after a court found former officials from the government's Popular party guilty of accepting bribes for public contracts, and declined further after May 29 when Socialist Party leader Pedro Sánchez brought the no-confidence motion in response to the convictions.

Market action has been driven by political turbulence in Italy, which hit a peak when the country's president blocked the appointment of a euroskeptic candidate for finance minister, leading to the collapse of attempts to form a new government.

Analysts said a change in the Spanish government would not lead to any significant changes in policy, especially with regards to the banking sector, unlike the case in Italy where the prospect of new elections in the country will amount to a referendum on the euro.

"The political backdrop is extremely different in both countries. In Spain, the euro is not an issue ... Europe is not an issue in Spain, public support is quite high and all the four main parties support the European Union," said Antonio Barroso, deputy director of research at political risk consultancy Teneo.

"It would be very unlikely that the government would make a huge policy shift affecting the banking sector," he said.

In addition, Spain went through a political impasse in 2016 when two sets of elections were inconclusive, and the political deadlock did not impact the economy, Barroso said.

Banco Santander SA Executive Chairman Ana Botín called for "stability and certainty," saying nothing should be done to jeopardize Spain's economic turnaround, financial newspaper Expansión reported May 31. She said Spain had seen an inflow of foreign capital over the last few years, but there were growing concerns about a potential slowdown in the economy.

Political uncertainty, however, could continue over several months in the country, with elections likely, analysts said. Should the Socialists take control of the government, they will need to form a coalition and will need the support of the smaller nationalist parties, as they only have 84 seats in parliament.

"The strategy of Sanchez is to stay some months, for as long as he can, to try to do some reforms that he can sell to voters ahead of an election," Barroso said.

A future government will also have the question of Catalonia to deal with. The political situation between Catalonia and the Spanish government has been fraught since the northeastern region held an independence referendum on Oct. 1, which was declared illegal by Spain's Constitutional Court. It led to the exile of Catalan President Carles Puigdemont, and the imprisonment of pro-independence politicians.

"Catalonia will remain complicated because it is not a motion of no-confidence that will change the huge degree of polarization that you have in the region," Barroso said.