Some Overlooked Takeaways From Spain and Greece

Editors’ Note: MarketMinder is politically agnostic. We prefer no party nor any politician and assess developments for their potential economic and market impact only.

Debt ceiling brouhaha has dominated headlines in America, but don’t overlook international political developments—and a couple of note popped up in Europe amid the din. Spaniards will head to the polls early—in July versus December—while Greeks will go to voting booths again in a couple weeks despite May’s election returning a clear winner. We see some interesting takeaways for investors in both. Read on!

Nobody Expects Spanish Gridlock

Spanish Prime Minister (PM) Pedro Sánchez’s Socialist Workers’ Party did poorly in May’s local elections, confirming what polls have shown for months: The ruling party has lost ground to the center-right Popular Party (PP). In response, Sánchez dissolved parliament, triggering a snap election for July 25—five months early.

The move may seem counterintuitive given the Socialists’ flagging popularity, but Sánchez’s decision takes advantage of the country’s fractured politics. For PP leader Alberto Nunez Feijoo to become PM, his party must win a majority, form a coalition or convince other parties to abstain from rejecting a confidence motion. The PP currently polls at 32%, probably not enough for an outright majority in Spain’s proportional representation system (i.e., parties gain parliamentary seats in proportion to their share of the vote).^[i] The latest polls suggest the PP and far-right party Vox could win enough seats to form a two-party coalition, though it is close. If the PP can’t form a majority with Vox, Feijoo would likely struggle to gain smaller parties’ support since many regional groups oppose Vox’s nationalist ideology. If the PP fails to form a government, Sánchez would likely get the opportunity to reform his minority government, reset the electoral cycle and remain in power.

Whether or not Sánchez’s gambit pays off, it looks unlikely any one party will have an outright majority in parliament, which implies a coalition or minority government—the norm for Spain these days. The Socialists and leftist Podemos have run a minority coalition government since 2020, and before that, the PP headed a minority government from 2016 – 2018. Given the aforementioned party divides and lack of majorities, whoever is running the show is unlikely to have a ton of clout, limiting their ability to pass major legislative change. That doesn’t mean nothing happens—rather, whatever does pass is typically watered down from initial proposals.

Take the incumbent administration. Though it pushed through some changes, including public pension reforms, it didn’t completely undo and overhaul past labor reforms. Today, many we follow are monitoring the Sanchez government’s new housing law, which includes provisions for national rent control. There is talk in coverage we have seen that a PP-led government may try to reverse the measure, which cheers some folks and worries others. A lot of that chatter is sociological, but rent control does impact the economy, making it one to watch. But overall, we think gridlock looks likely to dominate Spain’s political backdrop—a bullish feature prevalent throughout the developed world.

Greece’s Reemergence

Greek Prime Minister Kyriakos Mitsotakis’s center-right New Democracy did better than expected in May’s general election, winning 40.8% of the vote. In response, Mitsotakis … rejected the fresh mandate to form a government, opting instead for a new election on June 25. While this may seem odd, a new electoral law takes effect at the next ballot: If the winning party takes 40% of the vote, it will receive 50 “bonus” parliamentary seats. If they repeat May’s feat, that would give New Democracy an outright majority—making Greece an outlier in a sea of gridlocked legislatures.

In this case, we think markets see this as more of a benefit than a risk, given the room for pro-market changes. The government has a big to-do list on this front, from reducing red tape to maintaining a budget surplus, in hopes of turning Greece into a European financial center and returning to Developed Market (DM) status. Markets appear to us to be pre-pricing these prospects already: Greek stocks rose 8.7% last month, well ahead of broader Emerging Markets’ (EM) -1.7% dip, and have vastly outpaced EM year to date (36.8% to 5.0%).^[ii] According to our research, stocks move first, and investors should keep in mind the difficulties for the government to meet high expectations once political realities set in.

Whether New Democracy passes “market friendly” reforms or not, Greece’s political stability today is a far cry from the country’s debt crisis days over a decade ago—a timely reminder of how quickly a situation can improve. Back in 2010, the government announced its budget deficit was much larger than thought, leading to an austerity program—and, eventually, a rescue package from eurozone finance ministers (which included strict reform commitments). But the country’s troubles didn’t go away. In 2012, Greece received another bailout and defaulted twice, and concerns surrounding the country’s finances prompted index provider MSCI to reclassify Greece from DM to EM in June 2013.^[iii]

The drama reached a fever pitch in 2015, when firebrand Alexis Tsipras and his upstart Syriza party won big in a snap election on the promise of ending austerity measures imposed by creditors—which stirred “Grexit” fears. That culminated in a July referendum, in which Greek voters rejected the terms of international bailout … yet the country didn’t exit the euro. Instead, Tsipras moderated and compromised, and Greece received more bailout money and remained in the common currency bloc. The leftist administration made significant reform progress in the next few years, in our view.

A decade after Greece’s demotion to EM, we have seen discussion of Greece going back to DM. Reclassifications aren’t market drivers, but they do reflect well-known developments—and in the case of Greece, its progress since the debt crisis. On the political front, Tsipras settled in as a frontline eurozone politician, staying in office until 2019 and is now serving as opposition leader, rarely making international headlines. The Mitsotakis government has cut corporate taxes, passed pension reform and progressed on privatization deals. Greece repaid some IMF bailout loans two years earlier than estimated, and the Hellenic Republic found healthy demand in debt markets—it sold a 30-year bond in March 2021, the first since the global financial crisis.^[iv] Another way to see the return of investor confidence: 10-year yields on Greek sovereign debt have fallen from 10.9% in June 2013 to 3.7% today.^[v] Not having gridlock in a small EM isn’t likely to be a market hang-up, but we think Greece’s political environment today is another example of longer-term, overlooked improvement against today’s broader pessimistic sentiment backdrop.