Spanish Scandals and Sovereign Debt: Navigating Political Risk in PSOE-Backed Assets

The corruption and sexual harassment scandals engulfing Spain's PSOE government have destabilized Prime Minister Sanchez's leadership, risking early elections or coalition collapse. Protests and internal party fractures—such as the detention of third-ranking official Santos Cerdán—signal a crisis undermining investor confidence.

Political instability directly pressures Spanish 10-year bond yields, which remain volatile despite a narrowing spread versus Germany (currently 0.61%). A government collapse could widen this gap as risk premiums rise.

Public infrastructure projects, a PSOE priority, face delays if spending approvals stall. Utilities and construction firms like Acciona and Ferrovial, reliant on government contracts, are vulnerable to short-term sell-offs. However, prolonged exposure risks arise if credit rating agencies—already critical of Spain's anti-corruption governance—downgrade its debt.

Tactical strategy: Short Spanish bonds to exploit widening yield spreads and bet against utilities/construction equities. Hedge with Eurozone credit default swaps (CDS) to mitigate systemic risk. Monitor coalition votes and Cerdán's Supreme Court testimony (June 25) for catalysts.

History warns: Scandals like the 2009 ERE case triggered market selloffs. With PSOE's support at 27% and PP gaining traction, the window for tactical shorts remains open—but exit before systemic contagion.