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Spanish elections bring uncertainty; debt fears re−emerge

recursFacing a 21% unemployment rate, debt concerns, slowness in reacting to the economic crisis and with the young people taking the main squares in Madrid, Barcelona and Valencia among other cities around the whole kingdom, Spain will vote Sunday with all eyes put over possible changes as socialists risk to lose key areas. That could provoke changes in the Spanish economic policies.

The euro zone will face another challenge this weekend, with local elections in Spain. The Socialist ruling party is not only facing the risk to lose power over several cities, but it is also suspected of hiding piles of undisclosed debt, which could undercut the country's effort to avoid an international bailout. 

Last Sunday, May 15, under slogans as “Another World is Possible” and “Don't vote for them”, groups of young people took the 'Puerta del Sol' square in Madrid and 'Plaça Catalunya' in Barcelona. Since then, they've been followed by many other cities. Protesting against politics practices of all parties (PSOE, José Luís Rodríguez Zapatero's party, but also the opposition Partido Popular), they are calling their fellow citizens to reject and stand up against the traditional economic policies. Now the election results may be a little bit different than what polls previously estimated and experts will eye Spanish elections to see how the market could react on Monday and with the perspective of a general elections in the 2012 Spring season.

Losing elections will probably make Zapatero government collapse which will increase risk aversion all over the euro zone. If debt suspicion becomes true, Spain may need the bailout that it has been denying lately, sending the euro even lower against major rivals.

The Euro depends on Spanish stability. "Spain is the bigger risk in our opinion. There are two risks from Sunday’s election results. Firstly, that they may deliver the ruling Socialist government a big defeat causing the Zapatero government to collapse," says Kathleen Brooks, Research Director UK and EMEA for "Political turmoil would be greeted negatively by the bond market, which thrives on stability. The opposition People’s Party (PP) is expected to perform well and if they receive a large enough share of this Sunday’s votes they may demand a general election and the resignation of the government."

Debt concerns are over the table again in Spain. Suspicions started 5 months ago when a government change in Spain’s Catalonia region revealed a budget deficit more than twice as big as previously reported. Most of the regional Autonomies had in 2010 a budget deficit more than the target of 2.4% of regional GDP and almost the 6.4% in the case of Castilla La Mancha. 

"Right now we think that the Spanish elections are the biggest event risk for the Eurozone and the single currency over the next few days," Brooks continues. "Although EURUSD has come off, it remains well supported above 1.4000 – a key psychological level for investors. If investors start to lose faith in Spain that could see us quickly back to the 1.1800 lows we experienced this time last year during the first Greek bailout."

Majors on focus

Dollar is currently back higher against most European rivals, ahead of the risk events of the weekend above mentioned, following stocks and commodities sinking on Bundesbank Greece risky outlook. "EUR/USD is back below 1.4250 static resistance area, after failing to hold gains above 1.4300 again," comments Valeria Bednarik, Chief Analyst. "Bearish pressure increases as the pair approaches to 1.4140/50 static Fibonacci support area, while past week low at 1.4040 seems now the key level to break to see a stronger slide in the cross probably towards 1.3850 in the upcoming week. As long as capped by 1.4300, bearish bias will prevail. Only above the still distant 1.4440 area, the bullish momentum will resume."

GBP/USD continues limited to the upside by the daily ascendant trend line broken last week, now around 1.6300, and with an increasing bearish momentum. "Heading towards 1.5970, the market attention remains focused on rates, so as long as the BOE stance remains unchanged, the Pound will pay the consequences," continues Bednarik. "A clear recovery above 1.6350 is now needed only to ease the bearish pressure, while 1.6550 will likely keep the upside limited."

USD/CHF bearish tone remains unchanged, "as Swiss Franc strength on risk aversion runs overcomes the dollar ones. Hovering around 0.8800, and as long as below 0.8940 recent highs, the pair is expected to extend dominant trend to fresh record lows around the 0.8400 area," Bednarik says.

"The greenback is also higher against the rest of the European currencies today," concludes Bednarik, "although well below past April highs, keeping the long term trend against the dollar alive."

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