Legal uncertainty threatens new reductions in the Spanish rating

The Amnesty Law and the interference in the judicial sphere that the investiture pacts entail are far from constituting an exclusively political problem. They will also have an impact on a delicate and intangible aspect, but very relevant for investors and markets, such as investor confidence.

In fact, the experts consulted by elEconomista.es highlight the possibility that the main credit rating agencies take note of the growth of political instability, and in parallel of the legal uncertainty in future reviews of the rating of the debt issued by the Kingdom of Spain. A scenario of this type was expressly anticipated late yesterday by one of those organizations, Moody’s, which already grants our country a Baa1 rating.

“The risk of negative consequences on the credit rating is real“, according to the partner of the Bernal & Sanz Bujanda firm, Miguel Ángel Bernal. In his opinion, Spain faces a particularly favorable moment for this type of deterioration, not only because of its internal problems, but also “due to the fact that Italy “Thus, a contagion effect that affects the whole of southern Europe, such as the one seen in the public debt crisis of 2011-2012, would not be unusual.

Given this horizon, Bernal highlights that “a fall of rating would be very harmful, since a higher cost would be assumed for financingcould lead to curbing the demand for our debt and would also make public financing more expensive.”

That is a scenario typical of a “failed State and economy”, precisely the destiny “to which Spain is heading”, according to the president of Freemarket Corporate Intelligence. Lorenzo Bernaldo de Quirós argues that “The institutional framework is the fundamental variable to explain the economic growth of countries in the long term. “To this must be added a policy of macroeconomic stability.”

‘Frankenstein 2’

And adds that “In Spain, neither of these two requirements exists today. They were clearly eroded in the last Legislature and In view of the Government’s agreements with its partners, this dynamic will be accentuated during the Frankenstein 2 Executive.. The combination of a solid rule of law and freedom of enterprise are essential to generate wealth and prosperity for all. Both are at serious risk of survival in Spain. In this context, the incentives to work, save and invest disappear.”

The president of the General Council of Economists of Spain, Valentín Pich, extends this reasoning by saying that “Institutional stability and avoiding tension in society is an economic value at the internal level and especially at the international level.“. Pich adds that “predictability and tranquility is a first-level economic factor. In short, “in the international newspapers, either you don’t have to appear, or you have to do it positively” to avoid decisions like the one that threatens to degrade the credit quality of Spain as a whole.

The impact, however, may be variable within the same country depending on the territory considered. “Without a doubt, there will be fewer incentives to invest in certain areas if the threats and pressures for the return of the corporate headquarters of the companies that left Catalonia since 2017 become widespread.“says the economist and researcher at the Foundation for Financial Studies, Javier Santacruz. “It is the region that concentrates a good part of the inflow of foreign investment into Spain, so the effect is very important,” he clarifies.

The Catalan vision

Consequently, knowing the Catalan point of view is especially important. From business circles in that autonomous community, which prefer to remain anonymous, they emphasize the importance of political stability and legal security for economic development, and recall the example that The absence of these two factors were determining factors in the transfers of corporate headquarters outside Catalonia in 2017. “These types of factors are needed to generate the confidence that economic dynamism requires,” they indicate.

More specifically, a businessman in the Catalan real estate sector emphasizes the uncertainty that is generated when public policies collide with the limits of legality and a judicialization occurs that prevents visibility into the future and planning the business strategy because companies do not know which regulatory framework will prevail.

Caution regarding future economic developments predominates even among experts who strive to avoid any alarmism regarding the turbulence that threatens the recently begun legislature.

Thus, “even though the way things are, the impact does not have to be very significant”, Antoni Cunyat, collaborating professor at the Law and Political Science Studies at the UOC (Open University of Catalonia), believes that “we must wait until see how things will evolve in the coming years. “Any political instability does not help the economic terrain“explains Cunyat.

There are, without a doubt, ways to avoid deterioration. José Manuel Corrales, professor of Economics and Business at the European University, points out one of them: “If we delve deeper into the line of social dialogue between employers and workers that gave birth to the labor reform, it is likely that The formation of the new government could be a step towards greater social and territorial cohesionas long as constructive dialogue prevails over partisan tensions.”

The problem, however, of Spanish institutional deterioration already has a long history that the negotiations for the investiture of Pedro Sánchez have only deepened.

Sources from a very important financial entity recall that, “according to the metrics compiled by various institutes (Legatum, Frazer, World Bank or Wurztburg), Spain has an institutional quality measured through prosperity indices, perception of corruption, and democratic quality., government effectiveness and economic freedom) which is more than 10 points lower than the average of the 8 most developed countries in Europe. “That is something that weighs on investment decisions in the country.”

“We consider that anything that involves an erosion of institutions and separation of powers, as well as the legal security of liabilities will be perceived as further deterioration of this institutional quality and good work for business and investment“explains that same source, adding that “if it entailed any type of damage from these aforementioned variables, it could have a bearing on the investment.”

Returning again to the particular case of Catalonia, the deterioration in terms of investment confidence has already reached worrying levels.

Bad ratios years later

Despite the years that have passed since the most dramatic moments of the process, “the province of Barcelona continues to be the one that has worst proportion in Spain in terms of companies that locate their headquarters in that territory and those that leave“, according to the data managed by the editorial advisor of elEconomista.es, Fernando P. Méndez.

Also from Catalonia, Guillem López Casasnovas, professor of Economics at the UPF, outlines a devilish political panorama for the coming years “If after the investiture the PSOE castles by not attending to any of the proposals, nor evaluating the opportunities (if any), perhaps this will satisfy its parish that is now most reluctant to change, but it would be a new joke to many Catalans who in full exercise of political rights, could be, once again, very expensive”.

Political instability not only acts externally, scaring away investors. In parallel It also has consequences on the exchange of goods and services with other economies.. According to the Exporters Club, “the negative impact on the export sector of the plans announced by the President of the Government in his investiture speech must be considered, by increasing labor, social and fiscal costs. The announced measures may lead to a decrease of the productivity of the Spanish economy, which has already been stagnant for many years.

The organization thus recommends “adopt measures that provide certainty to the Spanish economy and encourage the increase of the export base and attracting investment, to avoid the loss of competitiveness of our foreign sector”, which would deepen the slowdown of the Spanish GDP.

Returning to the negative effects in terms of the domestic economy, Santacruz foresees “a fiscal pressure that will increase to cover the costs of what was agreed, especially the transfer of the management of the Social Security economic regime to the Basque Country (as long as what they will do is subsidy contributions to Basque companies and provide supplements to pensions, which cause more deficits and, therefore, a greater need for income via increased contributions)”.

Miguel Ángel Bernal worries that “it will lead to a relocation of Spanish companies to other destinations. We already have a recent Ferrovial case and a notice from Repsol“. “That is not good for the economy, much less for employment, our Chinese in the shoe, due to unemployment, precariousness and low salaries that still characterize the labor market in its current situation.”

Europe Watch

In this regard, “There are reforms, such as labor reforms and others, that could be questioned by the European Commission“. “This situation would lead us not only to freeze the arrival of funds committed and pending disbursement, but even to return the resources already received. Such a horizon would be tremendous for our country,” he concludes.

The way to avoid the dead end, according to José Manuel Corrales, is through “a constructive dialogue between the PSOE and the PP to strengthen institutional and economic stability. Collaboration between the two major parties could lead to fundamental agreements to address crucial challenges, such as economic recovery and the crisis caused by the war in Ukraine and the most recent in Gaza. A bipartisan understanding would contribute to the implementation of consensual policies, providing certainty to the markets and generating trust both nationally and internationally.

Article prepared by José Miguel Arcos, Estela López, Carlos Asensio, Juan Ignacio Álvarez and Alfonso Bello Huidobro.