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New elections for Spain - and the same chaos all over again?

Spain's King Felipe is meeting with the country's political parties Tuesday in a last-ditch bid to end a political impasse that has left Spain without a government since December.

Since an inconclusive election four months ago which resulted in a hung parliament, Spain has been left in political limbo with the main parties, the conservative People's Party (PP) and the Spanish Socialist Workers' Party (PSOE), unable and unwilling to form a coalition government.

Spain's traditional political establishment was largely fractured by the rise in popularity of three smaller parties including the anti-austerity Podemos, centrist Cuidadanos and Communist Party-led United Left.


GERARD JULIEN/AFP/Getty Images

King Felipe is due to meet with leaders of all the parties, excluding the United Left (whose leader the king met on Monday), in his third attempt to unblock the situation, Reuters reported. He will then meet caretaker Prime Minister Mariano Rajoy, who heads the PP, later in the day. The talks are widely seen as the last chance to form a government before a May 2 deadline but analysts think new elections on June 26 are now the most likely scenario.

"The king's last round of consultations with political parties will not lead to a government formation deal," Wolfango Piccoli, co-president of risk advisory Teneo Intelligence, said in a note on Monday.

"Once the meetings conclude, (King Felipe VI) will probably confirm that new elections will have to be held on 26 June, as parties are not expected to make any last-minute efforts to form a government," he said.

Not boding well for any forthcoming election, opinion polls currently suggest a "very similar picture to the one that emerged after the 20 December elections, with the PP dominating the new vote and, crucially, an equally fragmented parliament," Piccoli noted.

"Whether the results of the new vote will substantially differ from those of the last election will depend on: a) how parties manage to tag each other with the blame for the failure to form a government; b) the ability of Podemos to cut a deal with the United Left and; c) potential internal turmoil within the main parties."

Further political stalemate is the last thing that Spain's recovering economy needs with unemployment still high at 20.4 percent in February, according to Eurostat, although the rate is steadily improving.

So far, however, the economy has shown "surprisingly few signs that Spain's political uncertainty has dented economic activity," Pantheon Macroeconomics' Chief euro zone economist Claus Vistesen said in a note on Monday.

"Real gross domestic product (GDP) likely rose 0.7 percent quarter-on-quarter in the first quarter, down only slightly from 0.8 percent in Q4, and still far stronger than the other major euro zone economies," he noted.

Another election was Pantheon's base-case scenario and that "an increase in Spanish bond yields is a good bet in the coming months." Over the last week, Spanish 10-year bond yields have risen from 1.535 percent to 1.645 percent, showing market nerves over the drawn-out talks.

Vistesen said that that growth risks were also "tilted to the downside" this year. "Significant fiscal tightening is inevitably, even with signs that the European Union is moving towards a more flexible stance on austerity." In particular, Spain's ability to reach European Commission budget deficit targets will be a challenge, he said.

"Spain's budget deficit was 5 percent of GDP (gross domestic product) last year, higher than the objective of 4.2 percent. We doubt that the (European) Commission will push for a reduction to the original target, below 3 percent in 2015," he said.

"A recent statement from the interim finance minister, Luis de Guindos, indicates that Spain will aim for 3.6 percent. But the EU will try to push for a lower number, and tough negotiations with the Commission will be the first big test for the new Spanish government," Vistesen said.

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