By Danilo Masoni
MILAN (Reuters) - Spanish stocks have been hit hard by worries that a possible coalition government of the Socialist and far-left Podemos parties could overspend and tax banks, although analysts say their lack of a majority should curb any policy radicalism.
The fall in stocks this week has further widened a performance gap with the broader European market, which is hovering near a four-year peak as concerns ease about Europe's economy and optimism over a trade deal between China and the United States grows.
"Podemos is a radical left party that's not well known by investors and that has triggered fears about what ... a coalition government with the Socialists would do in terms of economic policies (and) public spending," said Jesus Castillo, an economist at Natixis in Paris.
Among investors' fears is a possible bank tax that has been discussed in the past, or a rethink of plans to privatise state-controlled Bankia <BKIA.MC>, which was bailed out by the government in 2012.
The pact between Socialists and Podemos is just a preliminary deal and they also need support from other parties, which would probably temper possible polices.
Madrid's IBEX main share index <.IBEX> is down 2.3% so far this week, weighed down by losses among banks, with Bankia down more than 8%. Also heavily hit were banks with big exposures to the domestic market, from Caixabank <CABK.MC> to Bankinter <BKT.MC> and Sabadell <SABE.MC>, while worries about a tax on financial transactions hurt exchange operator BME <BME.MC>.
The pan-European STOXX 600 <.STOXX> index is flat since Friday's closing.
The contrast is even starker over a longer period. The IBEX is trading at its lowest point relative to the STOXX since the inception of the pan-European benchmark in 1998. So far this year the IBEX has gained 7.6% and the STOXX is up 20%.
(Graphic: IBEX vs STOXX link: https://fingfx.thomsonreuters.com/gfx/mkt/12/8677/8597/Spain%20IBEX.png).
Analysts say the latest drop was probably an over-reaction but that prolonged political uncertainty in Spain, which has had four elections in as many years, has taken a toll on investor sentiment.
Natixis' Castillo said the prospect acting economy minister Nadia Calviño will stay in the new government should be reassuring, and noted that the Socialists and Podemos committed in their draft agreement to respect European Union fiscal rules.
"I would say Calviño is an orthodox in term of fiscal policy. She's not going to spend or increase taxes unreasonably," he said.
Daragh Quinn, analyst at Keefe, Bruyette & Woods in London, said he believed a minority coalition would find it a challenge to approve any major legislation.
"The possibility of a bank tax could be discussed again ... but given that this idea was already dismissed in the past, our base-case assumption is that a specific bank tax on profitability would not be passed," he said.
He said he expected the new government to remain committed to the privatisation of Bankia, but that any move to do so would meet significant resistance from the European Central Bank.
After this week's heavy sell-off, pressure on Spanish stocks was somewhat easing. The IBEX fell 0.2% on Thursday.
"The situation can generate in the short term some worries ... (But) The good news is that it seems there's finally going to be a government in Spain," said Natixis' Castillo.
ADVERTISEMENT(Graphic: sp banks link: https://fingfx.thomsonreuters.com/gfx/mkt/12/8679/8599/Spanish%20banks.png).
(Reporting by Danilo Masoni, additional reporting by Jesús Aguado in Madrid, Editing by Catherine Evans)
