The leader of the Spanish People’s Party (PP), Mariano Rajoy, is trying to form a coalition government following the country’s second general election in six months last Sunday. At a time of post-Brexit referendum market jitters, the vote in the Eurozone’s fourth largest economy has set off what could be further protracted coalition talks and political instability because the PP emerged as the largest party but once again short of an overall majority.

A dominant story of the election is the shattering of the long-running post-Franco political duopoly of PP and the Spanish Socialist Workers’ Party (PSOE) that has dominated the country since the late 1970s. The two ‘new’ parties — the anti-austerity Podemos in coalition with Izquierda Unida (a remnant of former Spanish Communist Party), and the centrist, business friendly Ciudadanos — may now have broken this two-party system for good.

The combined vote of PP and PSOE, which was around 85 per cent of the ballot in the 2008 general election, fell to around 55 per cent last Sunday in a low turnout election. Filling this political vacuum are Podemos and Izquierda Unida (collectively known as Unidos Podemos), seen as the sister grouping of the ruling Syriza in Greece, and Ciudadanos whose rise has been fuelled by popular anger over political scandals, the fall-out from the deepest economic recession in the country for over a generation, and also the growing political clamour for independence in Catalonia.

While recent polls had indicated that Unidos Podemos could finish second, a result which would have further spooked financial markets, ahead of PSOE which is still widely blamed for the fact that it was in power at the time when the Spanish economy first went into recession, this did not happen. Podemos was formed in 2014 part to provide a stronger structure for Spain’s so-called indigados political protest movement, and has now secured not just its second third-place finish in the national parliament elections, but also more than 100 seats in regional parliaments, five MEPs in the European parliament elections, while candidates associated with the party have won mayoralties in Madrid and Barcelona.

The expected next step in the process will be for the king to formally propose a prime ministerial-candidate, very likely the PP’s Rajoy. That person must win a majority within 48 hours after the first vote, in order to form a government.

If this cannot be achieved, the king can propose other candidates. Technically, if no-one has the numbers to do so within two months of the first vote, parliament will be dissolved again and new elections triggered.

However, the major parties have ruled out a third straight election this year, recognising Spain can no longer afford further months of political stand-off. This is not least because the country’s public debt is reaching record levels this year, and European Commission impatience with the budget deficit is growing.

Given last Sunday’s result, there is now more than one scenario for the future national governance of the Eurozone’s fourth largest economy behind Germany, France and Italy. Firstly, given the PP’s status as the largest single party, it will now test out the waters for a pact with Ciudadanos, PSOE, and possibly other smaller parties, or potentially seek to run a minority administration.

Ciudanos is the PP’s closest rival, ideologically speaking. However, a key challenge is that the PP and Ciudadanos will not collectively have the 176 seats in the lower house for a majority by themselves.

It is also possible therefore that PSOE could offer support to PP by abstaining in key votes to allow it to continue in power. While this will be deeply unpopular with many of its supporters, PSOE could assert that it is acting responsibly by allowing the largest single party to govern.

If PP cannot work out a deal, PSOE will speak with Unidos Podemos, Ciudadanos, and smaller parties. A PSOE tie up with Unidos Podemos cannot be dismissed, especially as Podemos has hinted that it may be open for compromise on its support for a Catalan referendum which PSOE (and PP and Ciudadanos) is strongly opposed to.

From the vantage point of financial markets, none of these governance options will be as attractive as the 2011 election result when the PP won an outright majority of 186 seats. And the political uncertainty has the potential to undermine the economic recovery with gross domestic product growth forecast by the government to be 2.7 per cent this year, following the worst recession in decades that saw a property crash, and unemployment peaking at 27 per cent, and almost 60 per cent for young adults under 24. While the jobs market is improving, unemployment is now 21 per cent, more than double the pre-crisis rate of 8.5 per cent, and the second highest in Europe behind Greece.

As well as the economic pain and political scandals of recent years, a key backdrop to the election is growing tension between Madrid and separatists in Catalonia over issues such as linguistic rights and fiscal autonomy. Support for Catalan independence has increased since 2010 when a reform to extend the regional government’s powers was struck down by the Spanish Constitutional Court.

Last September, pro-independence parties won regional elections with just under 50 per cent of the vote. With the wind on their backs, separatists in Catalonia are looking to begin the process of independence from Spain, including the drafting of a new regional constitution.

Whereas the PP has taken a hard-line stance to the separatists since its election victory in 2011, the other parties have talked about the need for reform of the Spanish constitution to try to quell the regional demands for independence. Podemos has previously gone furthest by calling for a referendum on independence, and a new Spanish federation of semi-independent nations.

Taken overall, the election has resulted in further political uncertainty with no single party able to run a majority government. This underlines that any new multi-party administration, or minority government, could be unstable and may not last a full parliamentary term.

Andrew Hammond is an Associate at LSE IDEAS (the Centre for International Affairs, Diplomacy and Strategy) at the London School of Economics.