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Spain's ruling parties punished in the polls

Regional elections: Huge shake-up for Spain

Spanish stocks closed around 2 percent lower on Monday amid heightened political uncertainty following local elections that analysts say has ushered in a new "era" for the country.

Regional and local elections on Sunday saw Spain's ruling People's Party suffer its worst result in more than 20 years in a verdict of prime minister Mariano Rajoy's four years of austerity measures. The rise of new anti-austerity parties signals an uncertain period of coalition across the country, Europe's fifth biggest economy, experts warn.

"These elections have opened a new era for Spain and that is an era of political fragmentation," Antonio Barroso, senior vice-president at consultancy firm Teneo Intelligence, told CNBC on Monday.

Investors nervously reacted to the poll results, sending Spain's main IBEX index down as much as 2.2 percent. The index underperformed broader European shares, which only traded slightly slower.

Analysts said that while the stakes in the local election were different to the national election due later this year, Sunday's vote did provide a taster of voter sentiment.

Spain has been dominated by two political parties – the ruling People's Party and the opposition Socialists – since the end of dictatorship four decades ago. They are being challenged by two new parties: the anti-austerity Podemos, which stands for "We Can," and the market-friendly Ciudadanos "Citizens."

According to a report by Reuters, the Socialists and People's Party will have to negotiate coalitions with smaller parties in the 13 of Spain's 17 regions that voted on Sunday alongside over 8,000 towns and cities.

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"We now have four parties that matter instead of two and they will have to cooperate in order for the country to move forward," Barroso said. "I think investors will essentially have to get used to more political uncertainty going forward."

What about the economy?

Still, an economic recovery in Spain could see support for smaller parties such as Podemos, which have capitalised on anti-austerity sentiment, ebb in the run-up to national elections, analysts said.

"The economy has gone through a tough crisis, and some of the scars are still there but on the bright side, economic growth is picking up and this could have an impact on the (national) election result," Vincenzo Scarpetta, political analyst at Open Europe told CNBC on Friday ahead of the local elections.

Podemos' (We Can) party leader Pablo Iglesias waves to 'Ahora Madrid' supporters from stage on May 24, 2015 in Madrid, Spain.
Getty Images

Spain's economy grew 0.9 percent in the first quarter of the year from the previous one, marking its fastest rate of expansion since 2007. It also outpaced growth in Europe's big economies such as Germany, which grew just 0.3 percent in the first three months of 2015.

"In Spain the situation is different because we have strong growth in GDP (gross domestic product)," Philippe Waechter, head of economic research at Natixis Asset Management, talking on CNBC about the situation in Spain compared with Greece, where the anti-austerity Syriza party came to power following elections in January.

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"We can imagine that extreme parties like Podemas won't be as strong as expected a few months ago because employment conditions are stronger than they were."

But even with stronger economic growth, political uncertainty in Spain was not expected to go away anytime soon.

"Overall political uncertainty is likely to remain," said Barroso at Teneo Intelligence. "No one party will get an absolute majority at the next election, so we will have shorter duration governments and policy will become more unpredictable."