Bank of America warns of the Spanish political uncertainty

Bank of America Merrill Lynch warned on Tuesday of the risks to investor sentiment in Spain of due to increased political uncertainty, following heavy losses for the ruling People's Party.

It is increasingly clear that it it will be difficult to form a strong government in Spain

The US bank warned that despite the emerging economic recovery in Spain, the rise of leftist parties left it looking unlikely Prime Minister Mariano Rajoy's People's Party (Partido Popular or PP) will be able to form a strong government after the general elections that are due before December this year.

"It is increasingly clear that it will be difficult to form a strong government in Spain with the ability to meet the fiscal adjustments and structural reforms that will be still pending after the November elections," Merrill noted

The bank's analysts found the results of the weekend's elections were “even more fragmented than expected."

"With the market increasingly worried about Greece, the voting outcome could be more important than we think in the short term."

In their view, "the election results and potential coalitions will help us to examine the possibilities of coalition on a national level and whether they will be friendly with the markets. Whatever happens in these months could have a great influence on the results of the general elections."

Read more: Full coverage of the Spanish local and regional elections 2015

Political uncertainty will weigh on investor sentiment in 2016

Merrill said it expected the political uncertainty to "weigh on investor sentiment in 2016" due to a highly fragmented parliament, as it "could create a difficult and volatile environment for the adoption of reforms".

The conclusion is that "Spain still needs a structural adjustment of about 2.5 points in order to achieve structural balance in the coming years. The question is whether such a political scenario will allow a similar adjustment later. Which is worsened by the fact that a substantial part of the pension reform needs to be developed and implemented by 2019."

You may also enjoy reading:

Spanish stocks sag in aftermath of regional elections

Political mood in Spain dour despite economic recovery, FT says

Spaniards not about to throw economic recovery out the window, Berenberg thinks

Spanish centre-right PP to be forced into multiple regional coalitions