No one knows how much longer this madness can go on.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Despite the festive season, Spain’s business and financial elite are far from happy. In the wake of inconclusive general elections just before Christmas, the country now faces an uncertain future, and if there’s one thing most investors and companies do not like, it’s uncertainty.

Indeed, so unhappy are Spain’s corporate owners that they recently cancelled their pre-Christmas shindig. The Entrepreneurial Council for Competitiveness (CEC for its acronym in Spanish), Spain’s most powerful corporate lobby group, normally meets during the Christmas period to discuss the political landscape and ways of shaping it to its illustrious members’ advantage.

This year’s event was supposed to be held at Telefónica’s Madrid headquarters on December 22, just two days after Spain’s general elections. The mood of the party was supposed to be celebratory — Spain’s standing President Mariano Rajoy’s People’s Party (PP) was expected to pick up enough votes to form a center-right, coalition government with relative newcomers Ciutadans, a political party that had been carefully groomed by Spain’s corporate establishment and heavily promoted by the country’s media, with one end in mind: keeping the status quo intact.

Not enough Spanish voters seem to have read the CEC’s script. Many chose to vote for the Socialist party (PSOE) or the anti-austerity Podemos. However, the two parties did not receive enough votes to form a coalition. Neither did the PP, which picked up more seats than any other party, and Ciutadans.

In fact, the voting was so fragmented that the Eurozone’s fourth largest economy is not only missing a viable government; it is unlikely to have one for months to come. The only thing that can save Spain from being condemned to months of political limbo is if the socialist party chooses to commit electoral hara-kiri by forming a grand coalition with its arch rival, the PP — possible, but improbable!

In Catalonia, the radical leftist, anti-EU party CUP just rejected lending its support to the region’s messianic premier Artur Mas for the last time, meaning that unless Catalonia’s separatists can come up with a last-minute replacement, Spain’s richest region will have to hold new elections in March, raising the prospect of an electoral alliance between the anti-austerity, pro-referendum Podemos and the separatist, anti-EU CUP. Even if Catalonia does hold new elections in March, there is no guarantee that a viable coalition will emerge.

As I warned seven months ago, Spain could soon become ungovernable. Hence the climate of fear brewing in many of the country’s C-suites. The last thing businesses need – especially big ones that depend on government support – is a political vacuum, particularly at a time when Spain’s benchmark stock index, the IBEX 35, is already showing worrying signs of weakness.

In a year that has been broadly positive, albeit turbulent, for most of Europe’s biggest stock markets — an intended consequence of the ECB’s quantitative easing program — the Ibex 35 stands out as the worst performer. It has shed 7.2% over the last 12 months, its worst performance since 2011, the year when Bankia and many other Spanish savings banks hit the rails and speculation was rife that Spain’s government would need a massive bailout from the Troika.

By contrast the EuroStoxx 50 rose 4.5% for the year. Europe’s strongest performing index, Italy’s FTSE MIB, is up 12.7%, Germany’s DAX 30, 9.6% and France’s CAC 40, 9.5%. The Ibex 35’s underwhelming performance (on the first trading day of 2016, it shed another 2.4%) is particularly surprising given that Spain boasts one of Europe’s fastest growing economies. It is also one of the biggest beneficiaries of the ECB’s QE program.

Prolonged political uncertainty and instability can be a heavy cross to bear for any economy. During the election month alone the Ibex 35 nose-dived 8% – its worst December since 2002. Shares have also been hit by the recent sharp deterioration of Latin America’s biggest economies, in particular Brazil, to which many of Spain’s biggest corporations are acutely exposed. Among the worst performing companies of 2015 are Arcelor Mittal, having lost 56.9% of its market capitalization, OHL (52.2%) and FCC (41.4%).

The worst hit company of all, Abengoa, is no longer even quoted on the Ibex 35. As WOLF STREET reported, the Seville-based renewable energy giant could soon become Spain’s biggest ever bankruptcy. With its primary overseas creditors refusing to refinance the company’s massive, ever-expanding debt load and its bonds and shares losing almost all of their value, the only two things that can save the company now are a massive haircut for its investors during a restructuring or a government bailout. But as the political backdrop worsens, the chances of the company receiving a last-minute taxpayer-funded reprieve grow slimmer by the day.

This could pose a serious problem for the Spanish economy given that as each week passes the true extent of Abengoa’s debt exposure continues to grow. On Dec. 31, it was reported that the company owes an additional €10 billion in guarantees, insurance and other commitments that had not been included among its liabilities.

Granted, economic turmoil, bailouts and bankruptcies are nothing new in Spain. One thing that is new, however, is the current climate of political uncertainty. The last four years of economic duress and deeply unpopular labor reforms and bank bailouts took place against a backdrop of extreme political stability. After riding a tidal wave of public anger to landslide victory in the 2011 elections, Rajoy came as close to absolute power as any political leader could hope in an ostensibly democratic country.

Meanwhile, the external economic conditions of the last 12 months could not have been more favorable. The recent collapse in oil prices has saved Spain, a huge net energy importer, almost €15 billion — money that has helped bolster internal demand. At the same time servicing the country’s gargantuan public debt load has never been cheaper. Thanks to Mario Draghi’s financial engineering, the Spanish government was able to sell two-year bonds to investors at negative yield for the first time ever.

No one knows how much longer this madness can go on. One thing’s for sure: having no government that is willing to sign off on just about everything the markets and Troika demand will eventually take its toll on economic confidence in Spain. When that happens, the strength of the country’s economic recovery will be seriously tested — and will probably be found wanting. And that is precisely why Spain’s business and financial elite are not having a very happy New Year. By Don Quijones, Raging Bull-Shit.

Picking a teetering, over-indebted, financially engineered Spanish corporation, hiring its CEO, then shorting the shares. What a deal! Read… Mother of all Shorts: How BlackRock Made a Killing from Spain’s Biggest Ever Corporate Meltdown

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