Eyes on Spain election as debt bankers fear Brexit domino effect

LONDON, June 24 (IFR) - Bankers covering public sector debt fear the UK’s decision to leave the European Union could spur anti-establishment sentiment across the continent, starting with Spain where general elections are to be held this weekend.

Global financial markets plunged as the UK voted to leave the European Union in Thursday’s referendum. Bunds were the subject of a flight-to-safety bid and rallied strongly to -0.07%, having traded at 0.13% at one stage on Thursday, according to Tradeweb.

The referendum result had the opposite effect on peripheral sovereign bond spreads: Spain’s 10-year bond yields spiked 35bp at one stage to 1.82% before settling back down at 1.62%, according to Tradeweb. The levels were supported after the initial spike by local buying, bankers said.

Most bankers were sanguine about the short-term effect on public sector bond markets, believing that central banks will manage the immediate volatility situation effectively.

The concern is more for political contagion and headline risk ahead of a huge election cycle that begins this weekend in Spain.

“I hope on Sunday this election will go in the right direction - that is pro-Europe. That’s the big risk - if the rest of Europe follows the UK,” said one sovereign, supranational and agencies syndicate official based in Germany.

“On Sunday you have Spain, and then you have Germany and France next year and there are fringe parties making gains there as well - and don’t forget Donald Trump in the US.”

This sentiment was echoed by other bankers on Friday morning.

“My fear is not for the immediate future - the market has gone through so many crises over the past 10 years. It is more for the long-term future that I am very scared,” said one London-based SSA syndicate banker.

“We’ve always had populist parties in Europe, but a nation like the UK delivering such a populist message to the rest of the world is a game-changer,” he said.

Spain will hold a general election on Sunday, after agreement to form a coalition government fell through following the election in December 2015.

Coalition talks could once again drag on for weeks, but a strong showing for left-wing party Podemos could weigh on the Spanish government curve, bankers said. (Reporting by Abhinav Ramnarayan; editing Sudip Roy, Alex Chambers)