King Felipe Meets Rajoy as Uncertainty Seeps Into Spanish Market

  • PWC says corporate deals on hold until new government elected
  • Socialists increase chances of forging progressive alliance

King Felipe VI will meet leaders of three largest parties as he tries to guide Spain’s political leaders through a parliamentary impasse with Acting Prime Minister Mariano Rajoy struggling to gather the support he needs to stay in office.

Felipe will hold talks with Podemos leader Pablo Iglesias and the Socialist Pedro Sanchez before sitting down with Rajoy at the Zarzuela palace on the edge of Madrid Friday. Rajoy’s People’s Party is the biggest group in Spain’s new parliament after December’s election, but lost a third of its lawmakers to fall far short of a majority.

The Socialists, who finished second, are seeking the support of smaller parties to oust Rajoy and that campaign gained ground this week after Catalan separatists signaled they may back Sanchez and ruled out supporting Rajoy. Podemos, which shares the Socialists’ aim of helping the millions of Spaniards shut out of the economic recovery, has ruled out helping Rajoy from the start.

“Public expectations for Sanchez to be the prime minister are increasing,” said Narciso Michavila, chairman of the Madrid-based polling company GAD3. “Most of people see the potential negative impact for the economy of the lacking of a government.”

The uncertainty in the political arena has had a muted impact on the government-bond market so far, as the slump in oil prices adds pressure for the European Central Bank to extend its asset purchase programs. Investors demanded 127 basis points to hold Spain’s 10-year debt rather than similarly dated German bonds on Thursday, compared with 115 basis points before the vote.

Still, the political uncertainty is reaching other parts of the economy where the central bank’s measures have less direct influence.

“While the bond market remains calm, international investors in the real economy are much more cautious," said Jose A. Zarzalejos, a director at PricewaterhouseCoopers’s corporate finance unit in Spain. “A lot of our merger and acquisitions pipeline is in a wait-and-see mode as clients want to see what the rules of the game look like under the new government.”

Rajoy, who has 123 of the 350 lawmakers in parliament, said he’s seeking a pact with the Socialists and the pro-market group Ciudadanos which finished fourth in December with 40 seats. Sanchez has insisted that his 90 deputies will vote against Rajoy. Podemos, which has 69, is also set to oppose the PP, so it’s practically impossible for the prime minister to get through unless Sanchez backs down.

Sanchez says the PP should get the first crack at forming a majority because he won the most seats in December. If Rajoy fails, Sanchez will seek backing for a progressive alliance, like the one that ousted conservative leader Pedro Passos Coelho in Portugal in November. Parliament has two months from the first leadership vote to choose a prime minister before fresh elections are triggered.

Under normal circumstances the king’s responsibility for nominating a prime minister after the election is just a formality. Still in the current political leaders are unable to broker a resolution, his role could become crucial. In neighboring Portugal, President Anibal Cavaco Silva had to decide giving the Socialist leader Antonio Costa a shot at governing after his first choice, the conservative leader Passos Coelho, was ousted 11 days in office.

“These are uncharted waters, so the king has a lot of room to exercise his discretion,” said Alberto Dorrego, a partner at Eversheds Nicea law firm. “The most straightforward option would be to propose parliament gives the first chance to the candidate that won most lawmakers. But that might change if Rajoy tells him that he doesn’t have enough support so he doesn’t want to be the candidate.”

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