(Bloomberg) -- Spain’s acting prime minister, Pedro Sanchez, signed a coalition with the anti-establishment party Podemos on Tuesday as he seeks to end months of political gridlock in the euro area’s fourth-biggest economy.
Sanchez is trying to salvage the prospects of a progressive government in Spain after his electoral gamble backfired in Sunday’s election. He’ll still need to bolt on additional support before he can take office for a second term.
“The government needs to start moving as soon as possible,” Sanchez said at briefing ceremony in the Parliament in Madrid with Podemos leader Pablo Iglesias. “There was no justification for continuing the gridlock.”
The agreement draws a line under months of squabbling between the two leaders, whose failure to agree on a coalition over the summer tipped the country into its fourth election in as many years. All the same, investors will be concerned by an alliance with Podemos, which grew out of the crisis era protests that helped to inspire the Occupy Wall Street movement.
Spanish stocks tumbled. The benchmark index, the Ibex-35, erased earlier gains of as much as 0.5% to trade 0.8% lower at 4:06 p.m. in Madrid, making it the worst performing market in Europe. Bankia SA lost 4.4%.
In its election program, Podemos called for lawmakers to appoint executives at Bankia, which is majority owned by the Spanish-state since a bailout during the 2012 financial crisis. Economists have also expressed concern than the party could accelerate plans by Sanchez to once against boost the country’s minimum wage after he hiked it by 22% in January. The 10-point agreement that the two parties sent around on Tuesday also insists that public pensions increase in line with the cost of living, something that has raised concerns about the long-term health of the Spanish pension system.
The agreement marks a humbling climb down for Sanchez who chose a repeat election rather than form an alliance with Podemos in the summer and two months ago said he wouldn’t sleep at night if the party was part of his administration. In Sunday’s ballot, Sanchez’s Socialist slipped to 120 seats from 123 as the far-right group Vox saw a surge in support.
“It seems the rise of the extreme right has made it easier for the left to come to an understanding quickly,” said Alex Quiroga, a lecturer on Spanish political history at Newcastle University in England. “Of course, some people will say this is a decision they could have easily taken in May or June.”
Still Seeking Votes
The Socialist-Podemos pact won’t guarantee the formation of a government by itself. With a combined 155 seats in parliament, they will still need the support of smaller or regional parties to form an administration. An absolute parliamentary majority requires 176 votes. Sanchez said he’ll start talks immediately to secure the additional support he needs. To reach that threshold he’ll almost certainly need support from the Catalan separatist party, Esquerra Republicana.
The center-right group Ciudadanos won’t support Sanchez, according to El Pais newspaper. The conservative People’s Party, the second biggest group in Parliament, condemned the agreement.
“We’ve now heard the news that many Spaniards were fearing,” said Pablo Casado, the PP leader. “Pedro Sanchez has announced an agreement with Pablo Iglesias to form a radical government, which is the just the opposite of what Spain needs.”
A beaming Iglesias couldn’t hide his delight at sealing the accord with Sanchez.
“I’m satisfied to announce that we have reached a pre-agreement to form a progressive government in Spain, a government that combines the experience of the Socialists and the courage of Unidas Podemos,” Iglesias said after signing the agreement. “Pedro Sanchez knows he can count on our loyalty.”
The two parties agreed to focus the coalition on 10 points, ranging from the fight against corruption and climate change to control of spending. The agreement also addresses the Catalan political crisis, stating that the coalition will seek “the normalization of political life” in Catalonia. The parties said details of the agreement will be made public in the next few weeks.
Catalonia had been a key friction point in the parties’ previous attempt to form a coalition over the summer. At the time, Sanchez had said he couldn’t trust that Podemos would support his policies on the region.
Mas Pais, a group which split off from Podemos and won three seats in Sunday’s election, will support the coalition, party leader Inigo Errejon said in a tweet.
--With assistance from Jeannette Neumann and Macarena Munoz.
To contact the reporter on this story: Rodrigo Orihuela in Madrid at email@example.com
To contact the editors responsible for this story: Charles Penty at firstname.lastname@example.org, Ben Sills
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