* Opposition Socialists re-elect anti-austerity leader
* Spanish bond markets underperform euro zone peers
* Risk of political stalemate, new election rises
By John Geddie
LONDON, May 22 Spanish government borrowing
costs rose on Monday as one of the most outspoken critics of
Mariano Rajoy's conservative ruling party and its austerity
policies returned to lead the opposition Socialists.
In a year when Austria, the Netherlands and France have
fended off populist challenges at elections, political tension
in Spain - where a minority government is in power - had fallen
off euro zone investors' radar.
Pedro Sanchez - ousted last year after refusing to abstain
in a vote to help break a nine-month political deadlock - was
re-elected on Sunday, pledging to take a firm stance against the
market-friendly, deficit-tackling policies of Rajoy's People's
This will make it harder for Rajoy to secure the opposition
support he needs to push through reforms, increasing the
possibility of a hung parliament which he has warned would
trigger a new national election.
Rajoy also faces a vote of no confidence in coming weeks,
although the Socialists are not expected to move to topple the
government at this time.
"The fact that the PSOE (Socialist) party members have voted
for the candidate with the more left-wing agenda, should lessen
the stability of the minority government," DZ Bank strategist
Christian Lenk said.
Spain's 10-year government bond yield -- an indication of
the rate at which it can borrow cash in financial markets --
rose 4 basis points to a five-day high of 1.60 percent
The political ructions also impacted Spanish stocks, which
slid 0.6 percent, lagging the euro-wide index
which was down 0.1 percent.
All other euro zone equivalent bond yields were flat or
slightly lower on the day, while the gap between Spanish and
German yields was its widest in nearly three weeks
at 124 basis points.
A slew of corruption scandals have shaken the ruling
People's Party in recent years.
And it was this that Spain's anti-austerity party Podemos
cited when they filed the no confidence motion on Friday.
The motion will be voted on some time after next Thursday.
Sanchez has said he will not support the motion and even if
he did, the Socialists and Podemos together would not have the
numbers to make it stick.
But fresh anxiety in financial markets around European
politics comes as Greece's international lenders decide on the
next steps in its long-running debt saga.
Euro zone finance ministers and the International Monetary
Fund will seek a deal on Monday on debt relief that balances the
IMF's demand for a clear "when and how" with Germany's
preference for "only if necessary" and "details later".
Without the deal, no new loans can be disbursed to Athens,
which needs new credit to repay some 7.3 billion euros worth of
maturing loans in July.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Paul Day in MADRID; editing by John