Spain Could Follow Greece Down Anti-Austerity Trail

Greece's bailout expires at the end of the month, and negotiations have been less than productive—although it thus far has stuck to its guns in refusing either to consent to an extension of the bailout package or to drop its demands for concessions on austerity measures and debt repayment. Madrid's current government has distanced itself from Podemos, insisting that the differences between the two countries include the fact that Spain did not have to resort to a full-scale bailout (it did receive a bailout for its banking system, however, which it has already exited).

But with the rise in popularity of Podemos, often compared to Syriza, Madrid's current leaders may nonetheless find themselves out in the cold come elections. Markets are beginning to think so, as evidenced by the increase in Spanish bond yields since Syriza emerged victorious at the polls.

Spanish yields had been lower than those on Italian bonds, with Italy viewed as perhaps less willing to stick with economic reforms. However, the retirement of Italy's president before the end of his term made investors nervous, lest whoever took his place might fail to support Prime Minister Matteo Renzi's program of fiscal reforms; their fears that the populist wave could engulf Italy as well made themselves known in the bond markets.

But since the election of Sicilian judge Sergio Mattarella as the new Italian president, and investors' perception of him as a supporter of Renzi's reforms, has largely assuaged the worries of investors. In addition, the changing situation in Greece coupled with the increasing likelihood of a Podemos victory in Spain has changed the dynamic, with investors instead now viewing Italy as more willing to stick to reforms than Spain, and consequently punishing Spain in the markets.

According to Francisco Torralba, economist, Morningstar Investment Management, "The political reverberations of Greece to Spain will be very different depending on what happens in Greece." Podemos was formed in the first place to protest austerity measures, and although it's a young party—just formed in 2012—its growing popularity could give it the steam to win elections.

Torralba said, "Parliamentary elections will be held in November, and the polls right now place Podemos as the runner-up party, right after the incumbent moderate-right party, and well ahead of the moderate-left Socialist party. This is quite a departure from the traditional political spectrum in Spain, which was always dominated by two moderate parties (moderate right and moderate left), followed at a great distance by minority parties."

He continued, "Podemos' results in the November election will be shaped by a combination of domestic and foreign factors. At home, rumors of connections to the Venezuelan regime and tax evasion by some leaders of Podemos could be downfall of this new party. And we're still quite a few months away from November.

"Abroad, Greece's fate might play a role too. If Greece were to leave the euro, capital controls, rapid inflation and a deep recession would undermine the popularity of Syriza and, by extension, of Podemos. If Greece stays, while obtaining some concessions from Europe, the popularity of what Syriza's represents will rise, boosting Podemos, perhaps even leading to a victory." However, Torralba thinks this is unlikely.