As Spain heads to the election booths we take a look at the runners and riders and likely outcomes

The last thing markets need right now is a general election in one of the Eurozone's biggest members. Well, that's what we've got and there may be market ramifications when we open next week

I'm as much an expert on Spanish politics as I am on quantum physics, so I've asked one of ForexLive's best friends, Yohay Elam from Forex Crunch, for some insight and he's done us proud;

Forex Crunch's Yohay Elam

"Spaniards are going to the polls amid a supposedly growing economy and with the government saying the crisis is over. However, people in Spain cannot really feel this growth amid unemployment still above 20%, a lower standard of living and endless cases of corruption related to the ruling center-right PP party. The government of Mariano Rajoy is set to lose its absolute majority but this doesn't mean a return to the center left socialist PSOE, which is blamed for mismanaging the economy and corruption as well. Their new leader Pedro Sanchez has a lot of work ahead.

For the first time in post-Franco Spain, there are 4 parties aiming to take a big chunk of seats in parliament. The newcomers are left-wing Podemos ("We Can" in Spanish), which is allied with Syriza in Greece and has seen a similar fate: a rise to popularity and then some worries from the Spanish public after Greece's humiliation. Leader Pablo Iglesias has won the debate according to pollsters, but this may not be enough.

The second newcomers originated from Catalonia: the Ciudadanos ("Citizens") party led by the young Albert Rivera began as an anti-independence party in the rich northeastern region and competes with Podemos in garnering votes from those disillusioned from the mainstream and corrupt parties. The party is going from strength to strength in national polls.

However, the economic policy of this seemingly centrist party certainly lean to the right, and this could lead to a right wing PP-Ciudadanos coalition, despite the differences on tackling corruption and revitalizing the political system and despite the proximity of Podemos and Ciudadanos on those ideas.

Adding to the mix, there are many small parties with various political colors and from various regions, not only Catalonia. All in all, these elections are very different from previous ones.
Opinion polls show the ruling PP with close to 30% support, the main opposition PSOE with just above 20%, Ciudadanos under 20% and Podemos a close fourth, but the change in voting patterns and recent polling mistakes in the UK as well as in other countries leave many options on the table, with whispers that Podemos could actually do better than the polls suggest, but also the PP could gain more votes because of the timing of the elections.

For markets, an absolute majority is the best option but it doesn't seem real, so the impact of the elections depends more on the coalition that will be formed. A PP-Ciudadanos coalition would be the most market friendly in terms of economic policy but would undoubtedly complicate the tense issue of Catalonia. Both parties are opposed to a referendum and it could be a boost to secessionists. So, things could seem quiet for now but boil later on.
A stable left wing PSOE-Podemos coalition would also provide some stability for the long run, even though it would not seem too market friendly at first. Podemos supports a referendum for Catalonia and that could defuse the separatist movement. A referendum in Catalonia will most probably see the same result as in Scotland.

An anti-PP coalition (socialists, Ciudadanos and Podemos) is also an option, but this coalition would not last too long and it could also deteriorate later on because of the differences between the parties.

In general, the euro-zone is not functioning too well to say the least: Greece underwent another can-kicking exercise, Portugal has an anti-austerity government that is on a collision course with Brussels, the far-right is an issue in France and Spanish politics are about to get more complicated. Without real reform in euro-zone governance, a resolution to the economic crisis that will be felt by the masses and a more stable system, we will probably be limping from crisis to crisis for many more years."

The market will only likely be spooked by any worst case outcome. Government's have fallen in spades over the crisis so there is some risk here. It's a crappy time of the year for this event and it's going to go into the mix of the end of year flows. It will be worth keeping an eye on the headlines to see how things go

Many thanks again to Yohay for this great preview. Forex Crunch is a site we watch regularly at ForexLive and Yohay and his team know their onions, so please check it out

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