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Update: Spain yields jump, stocks sink as PM resists snap election calls

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Update: Spain yields jump, stocks sink as PM resists snap election calls

Spain's bond yields jumped and stocks sank as Spanish Prime Minister Mariano Rajoy resisted calls to hold snap elections in the country, keeping investors on edge as they continue to assess growing political risk in Italy.

"As far as it's in my power, it is evident that I want the legislature to last four years," Rajoy said after the opposition called a vote of no-confidence in his minority administration over a graft case involving former officials of the governing People's Party, Bloomberg News reported.

A judge said May 24 that there was evidence the governing party ran a slush fund for years, and the credibility of Rajoy's statement denying it "should be questioned."

The yield on Spain's 10-year government bonds jumped nearly 9 basis points to 1.486% as of 2:51 p.m. central European daylight time. Spain's benchmark stock index, IBEX 35, lost nearly 2% as of 2:37 p.m.

Yields were at 1.445% as of 5:08 p.m., up nearly 5 basis points. The IBEX 35 closed 1.70% lower.

Spain's Socialists, the biggest opposition party, filed a motion to oust Rajoy and have him replaced by Pedro Sanchez, Bloomberg News reported. Party leader Pedro Sanchez said he would call a general election if the Socialists win the no-confidence vote. Anti-establishment group Podemos backed the motion.

The Ciudadanos party, whose support in the Spanish parliament is necessary for Rajoy's government, has said it would put forward its own motion of no confidence unless Rajoy calls a snap election.

A snap poll is likely to take place in the coming months. If that happens, Ciudadanos is likely to secure enough support to form a majority government with either the People's Party or the Socialists, according to Barclays, citing the latest CIS poll.

"Such a majority coalition government would likely be more conducive to reforms and to a more stable legislature than the current minority government," Barclays said. "Given what polls suggest, a hypothetical coalition government of Ciudadanos-[Socialists] or Ciudadanos-[People's Party] would not be very different from each other, and either would be more stable and reform-orientated than a minority government, in our view."

Meanwhile, Capital Economics said a snap election would strengthen Spain's economy in the medium term, with a center-left coalition between Ciudadanos and Socialists seen as the most likely eventual outcome. "The current minority government struggles to pass legislation and is making almost no headway in battling Spain's structural issues. A majority center-left government would be more ambitious and able to achieve much more."

In Italy, two euro-skeptic parties are set to take power and try to implement a large stimulus that would breach the EU's fiscal rules.

Capital Economics warned that heightened political uncertainty in the eurozone suggests that the recent rise in volatility is likely to be sustained for a while.

CaixaBank SA's, Banco Bilbao Vizcaya Argentaria SA's and Banco Santander SA's shares declined 3.77%, 2.79% and 2.65%, respectively.