OREANDA-NEWS. Spain's election appears to reduce the risk of a repeat of the political gridlock that followed December's election, although the political landscape remains fragmented and the final outcome uncertain, Fitch Ratings says. With no clear winner, political concessions will be required for the formation of a new government.

The Popular Party (PP) remained the largest party, increasing its number of seats but falling far short of an absolute majority. The Socialist Party (PSOE) stayed in second place, losing a small number of seats. PP leader Mariano Rajoy said on Monday that he would begin seeking "some kind of government formula", but the allocation of seats and the differences between the national and regional parties again make it difficult to forecast any administration's exact composition.

Nevertheless, we think Sunday's re-run ballot is less likely to result in a repeat of the six-month political stalemate that followed December's election. There is little popular appetite for another election, and the PP's increased vote leaves it more strongly positioned to lead the next government, either through a formal coalition or in a minority administration.

A centre-right government of PP, Ciudadanos, and smaller parties PNV and CC, would be one seat short of an absolute majority. PSOE's stance will therefore be important in facilitating a PP administration or seeking to form a left-wing coalition. A PSOE-led majority coalition would have to involve most of the regional parties, producing a disparate grouping that may be hard to sell to a public that has increased PP's share of the vote. It would also be likely to require PSOE to make concessions on the issue of Catalan independence. A PP-led government therefore appears a more likely outcome.

Relative to December's election outcome, in our view the result has lowered the risk that the new government will be reliant on more radical political elements, resulting in a reversal of earlier structural reforms or further fiscal slippage. The PP's stronger showing has lessened to some extent the policy concessions likely to be required in its priority areas, such as protecting labour market reforms, if it forms a government.

As we said in our January affirmation of Spain's 'BBB+'/Stable sovereign rating, a key rating driver is progress in bringing down Spain's very high level of public debt, at 99.2% of GDP in 2015. This has been reinforced by worse-than-expected fiscal performance, with the 2015 general government deficit coming in at 5.1% of GDP, above the 4.2% target. Last month the European Commission supported a one-year extension to the timetable for exiting the Excessive Deficit Procedure, for a budget deficit of 3.7% of GDP in 2016 (up from the original 2.8%) and 2.5% in 2017. Further underperformance relative to revised targets could undermine confidence in Spain's fiscal consolidation effort.

So far, Spain's economic growth has held up well in the face of political uncertainty. Annualised GDP growth in the first half of 2016 broadly matched the 3.2% growth in 2015. But there are signs that the very high level of consumer confidence may have reduced and "Brexit"-related falls in financial markets represent a key downside risk. As a result, any further protracted period of political stalemate would be likely to have a more negative impact on confidence and growth in Spain than it did after December's election.