First round of Spanish elections has concluded with mixed to modestly positive results for Prime Minister Rajoy as his Popular Party won in its stronghold of Galicia but lost badly to separatists in the Basque region. In Galicia the PP won 41 out of the 75 seats up from 38 the period prior while in the Basque region the Basque Nationalist party won 27 seats in the 75-seat Basque parliament, followed by the separatist Euskal Herria Bildu coalition with 21 seats, meaning around two-thirds of the assembly will be made up of nationalists.

Still the wins by separatists were not unexpected and the victory in Galicia was seen as a boost to Rajoy’s fortunes as it was perceived as essentially a referendum on his policies of austerity designed to help navigate Spain out of its sovereign debt crisis. As, the Spanish daily El Pais put it, “ With this victory, the Prime Minister recover the strength to manage a possible imminent rescue and to move forward with measures that are targeted as having to do with pensions and with further cuts.” In short, the strong showing in Galicia indicates that Rajoy may now have the political capital to make a formal appeal for a bailout which would be viewed positively by the market.

Indeed the euro rallied in opening Asian trade on optimism over the Spanish elections rising to a high of 1.3065 despite weak performance by equities. The pair has since come off the highs but remains well bid as credit tensions continue to ease. Mr. Rajoy’s greatest asset may be the fact that since the introduction of the OMT program by the ECB ( which has yet to go into effect) Spanish interest rates have fallen markedly from a panic high above 7% to around 5.25% currently helping to ease the tensions in the country’s credit markets.

Mr. Rajoy faces yet one final test on November 25th when the economically powerful Catalonia holds its regional elections. Catalonia has been a political cauldron with calls for separatism running high. The Catalan government has not only called for a snap election but also for a non-binding referendum on the issue of secession. Secession is considered to be illegal the Spanish national government and it has warned that it will not allow such a vote to take place. Therefore the Catalan elections are being viewed as litmus test of the general population on their genuine political desire for sovereignty. The strength of the win by the ruling GUI party which has taken on a secessionist mantle is being viewed as key barometer of Spanish national unity.

For now the market has clearly breathed a sigh of relief that Spain remains relatively unified and that Mr. Rajoy can proceed with plans for stabilizing the country’s economy but concerns persist and any strong outpouring of secessionist desire in November 25 elections could once again revive the threat of fracture in the region.