No early elections in Spain, aide to new PM says

By Ingrid Melander

MADRID (Reuters) - Elections would not fix Spain's problems, a top aide to new Prime Minister Pedro Sanchez said on Monday, rejecting opposition calls for a snap vote as the minority government prepares to tackle a budget vote and the Catalonia crisis.

Sanchez, whose Socialist party holds just 84 of 350 parliamentary seats, was propelled into office on Friday after an unlikely alliance of anti-austerity and nationalist parties backed his bid to oust Mariano Rajoy's conservatives over a corruption scandal.

"It's clearly unusual to govern with 84 lawmakers but the political situation remains very fragmented and everything suggests a new election wouldn't fix that," Jose Luis Abalos, often described as Sanchez's right-hand man, told COPE radio.

The current legislature is due to end in mid-2020.

But the lack of anything approaching a majority as well as a series of tricky political hurdles - including the Catalan crisis, a still to-be-approved 2018 budget and expectations of stiff opposition from Rajoy's People's Party (PP) and the centre-right Ciudadanos - make it unclear how long his administration can last.

"The new government is going to be very weak," analysts from French investment bank Natixis said. "(Its) life expectancy (...) might be very short."

A Socialist lawmaker acknowledged that situation, saying that while Sanchez was now working on putting together a cabinet that wanted to push through social-minded measures, it would likely not last quite till mid-2020.

"We're not going to exhaust this legislature," Adriana Lastra told RTVE.

Sanchez can at least count on healthy growth momentum in the euro zone's fourth-largest economy, emphasised on Monday with data showing registered unemployment fell in May to its lowest level since the financial crisis erupted in 2008.

Financial markets also welcomed the relatively smooth handover of power in Madrid, with Spanish stocks posting gains and the yield spread on the country's bonds over benchmark German debt falling.

Moody's rating agency on Monday said it would leave its Baa1 rating of Spain unchanged.

"The change in government brings a period of heightened political uncertainty, but is unlikely to have any material impact on Spain's credit profile given the new government’s limited ability to either embark on major policy initiatives or reverse earlier reforms," it said.

ROOM FOR MANOEUVRE?

Catalan nationalist parties supported Sanchez in Friday's vote, but Abalos told COPE there had been no quid-pro-quo negotiations between the camps, or discussions over the fate of politicians jailed for their roles in the north eastern region's secessionist campaign.

Nationalists regained control of the Catalan government on Saturday, and said they wanted talks with Sanchez and would pursue their bid for independence.

Sanchez has also said he wants to talk, though he and his party are opposed to any independence referendum or secession.

The new premier also faces a potential early challenge from the PP, after lawmakers in the party said they did not rule out tabling amendments to the 2018 budget in the upper parliamentary house, where they have a majority.

Any attempt to block the budget - drafted by the PP while in government and voted through the lower house last month after delays - risks creating legislative delays that Sanchez can ill afford.

Over the next few days, Sanchez is expected to unveil a cabinet that may include independent ministers.

But a spokeswoman for Sanchez said at the weekend that it would not include members of the anti-austerity Podemos party which, with 67 lawmakers, was a key ally in helping him topple Rajoy.

That decision seems unlikely to make it any easier for Sanchez to push bills through a fragmented parliament.

However, fast-track decrees and control of the budget, once passed, should allow it to make some legislation, including on pensions, said Pablo Simon, a political science professor at Madrid's Carlos III university.

"He has some room for manoeuvre," Simon said, adding that he expected Sanchez's government to survive at least until after municipal, regional and European ballots due next May.

(Additional reporting by Jesus Aguado; Editing by Paul Day and Richard Balmforth)