Prospect Of Coalition In Spain Sheds Doubt On EMU Entry

By Robert Duncan and Terin Miller

8 March 1996

Dow Jones International News

Domestic investors will likely support Spanish markets in the near-term as participants place their bets on the Partido Popular (PP) forming a coalition government with the Catalan nationalist party or other partners in the next few weeks.

But the need for such a pact has cast doubt on any Spanish government's ability to qualify for Europe's proposed single currency by the end of 1997, analysts say.

'I didn't think they were going to make it, but even more so now,' said Giorgio Raedaelli, senior economist at Lehman Brothers International in London.

Raedaelli isn't alone.

'What all this does is just reduce even further the mild chance Spain might meet Maastricht targets,' agreed Sally Wilkinson, Spain analyst at UBS Ltd. in London.

To reach Maastricht criteria on inflation, debt and public deficit, analysts said Spain needs a strong government able and willing to cut deeply into Spain's deficit through structural reforms.

But with the PP in need of allies to form a government, and likely needing to fight for every piece of reform it might want instituted, a coalition government may not have the clout to do the job. The PP won 156 seats in Spain's 350-seat lower house of Parliament in Sunday's election, leading other parties but not by enough to form a government alone.

Markets tumbled for two days after the PP's narrower-than-expect victory Sunday, but have since steadied.

The peseta traded at 84.22 pesetas to the Deutsche mark late Thursday, stronger than 85.01 to the mark just after the election, and about even with 84.21 mark going into the vote.

IBEX-35 shares index ended at 3,755.22 points, just up from 3,669.24 points Monday, but still down about 5% from before the vote. The benchmark 10.15% bond ended at 101.65, up from 100.00 Monday, but down from 103.27 before the vote.

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