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Expect weakened growth in Spain as political deadlock drags on: Moody’s

Spain's prolonged political impasse will have a negative effect on the country's economy, according to Moody's Investor Service.

Sarah Carlson, Senior Vice-President at Moody's Investors Service, said on Monday that the prolonged political impasse was "credit negative for the Spanish sovereign" after acting Prime Minister Mariano Rajoy failed to get enough parliamentary support to lead a new government in two separate votes last week.

In a note on the political deadlock in Spain, Moody's Carlson warned that the economy – which has staged a strong recovery since Europe's financial crisis – would suffer.

"The economic and fiscal costs stemming from the ongoing leadership vacuum are rising and Moody's expects both weakening growth and continued fiscal underperformance heading into 2017."

That's bad news for Spain, which has managed to bounce back from its own financial collapse just a few years ago following the country's property boom and subsequent bust. In fact, it is one of the euro zone's most robust economies of the moment, its gross domestic product (GDP) expanding 0.7 percent quarter-on-quarter in the second quarter this year, beating Germany, the U.K., France and Italy, according to the latest European Commission data.

David McNew | Getty Images

Against a backdrop of economic optimism, the political impasse comes at a difficult time for Spain and stands to take its toll on economic stability. If a government cannot be formed in the next two months, the King of Spain will be forced to dissolve parliament and yet another election will be called – likely to happen in December.

If this happens, it will be the country's third general election in 12 months. Spain has been in political deadlock since inconclusive national elections last December and again in June because its main political parties have been unable to thread the needle and form a coalition.

"The political impasse increases the risk of a December general election, which would be the third within a year, and further weakens the prospects for structural macroeconomic and fiscal reforms," Carlson warned.

Spain, whose banking industry was bailed out in 2012, has been encouraged to implement structural reforms in order to rein in public spending, make its economy more dynamic and flexible and, crucially, to weather potential future crises. Carlson warned progress on that front could also be at risk now.

"The continued absence of a government undermines Spain's ability to meet its fiscal targets and address the structural weaknesses of its public finances, including a lack of effective controls over regional government finances, healthcare expenditures and social security reform."

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