The Spanish budget saga and what it means for markets - ING

"There is a deal between Spain's PSOE and Podemos on new fiscal measures for 2019, but that does not mean it will be passed in parliament," argue ING analysts and add: "We actually think the chances of approval are low. The Spanish-German spread has already increased and we can expect more volatility in the days ahead."

Key quotes

"The European Commission is also putting pressure on Sanchez to agree to a budget. European law states that a draft budget for the coming year should be made public no later than 15 October. If a country is not able to do that, then it should submit to the Commission a no-policy-change draft deficit plan (i.e. a DBP that shows the projections of the government at constant policies). This would be seen as a defeat for Sanchez."

"So what happens if Sanchez isn't able to find an agreement on the budget? One possibility is new elections. The PSOE is doing great in the polls and in that way Sanchez could get a firmer grip in parliament. Another possibility is that Sanchez rolls over the existing budget that was approved when the PP was in power. One drawback, of course, is that his supporters are expecting some rollback of austerity and so this is difficult to sell."

"There is currently a lot of uncertainty about the final decision, so we can expect volatility in the market for Spanish government bonds. The Spanish-German spread has already increased to 120 basis points from about 100 at the end of September."