Spanish Banks Warn of Financial Meltdown if Catalonia Votes for Independence

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But bluffs can backfire.

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

In Spain’s north eastern region of Catalonia, the fear-mongering and doom-saying is reaching a deafening crescendo. If voters return a majority of pro-independence politicians in next Sunday’s regional elections, all manner of economic disaster will befall the region — according to the defenders of Spain’s established political and economic order.

The doomsayers include the Spanish government, the main opposition party, PSOE, Angela Merkel, David Cameron, Barack Obama, John Kerry, the spokesperson of the president of the European Commission, Margaritis Schinas, and just about every business lobby representative in Spain. Some Catalan business leaders have even urged their employees to vote against independence, warning that a yes-vote on Sunday could lead to them losing their jobs — a major threat in a nation with over 20% official unemployment!

Warning of a Crisis

The latest chorus of doom and gloom came from Spain’s two biggest banking associations AEB and CECA, whose members include Banco Santander, BBVA, Banco Popular, and Bankia. They warn that the exclusion of Catalonia from the Eurozone will trigger “serious problems of legal insecurity” for banks based in the region. Those banks include Caixabank and Banc de Sabadell, Spain’s third and fifth largest banks respectively, both of whom are also members of AEB and CECA.

In their joint communiqué the two lobbying groups urge the people of Catalonia to honor Spain’s current constitutional order and safeguard the region’s membership of the Eurozone. Failure to do so, they warn, could jeopardize the ability of local financial entities to “protect depositors” (ha!) and “maintain the flow of funds to families, SMEs, and to the country’s productive sectors and job creators” (ha ha!):

The expulsion of Catalonia from the euro zone, resulting from a unilateral breakup of the prevailing constitutional framework (of Spain), would mean that banks based in Catalonia could face serious problems of legal insecurity. These difficulties would force entities to reconsider their operational strategy, with a resulting risk of reduced banking services, leading in turn to financial exclusion as well as to more expensive, reduced credit.

The result would be an acute liquidity shortfall followed by a corralito (bank run), a financial “strangulation” not too dissimilar to the fate a terminally dependent Greek economy recently suffered at the hands of the European Central Bank.

No Fail-Safes or Firewalls

However, Catalonia’s economy, unlike Greece’s, has not been isolated from the rest of Europe’s financial system. There are no fail-safes or firewalls in place and the private sector is still acutely exposed to risks in the Spanish system. The region’s two largest banks, Caixabank and Sabadell, not only owe lots of other banks in Europe (including the ECB) billions of euros; they are filled to the rafters with ECB-subsidized Spanish bonds – bonds whose face value would very quickly drop in the event of the collapse of Catalonia’s biggest banks. Sabadell is also the proud owner of British bank TSB.

As El Confidencial reports, for Caixabank, Banc Sabadell, and BBVA, Spain’s second biggest and globally systemically important financial institution, Catalonia represents roughly one-quarter of their entire national loan portfolios.

For European institutions to contain the fallout from a sudden financial deterioration of Spain’s richest region would be very difficult. And despite all the talk of Catalonia’s biggest banks upping sticks and relocating elsewhere – most likely to Madrid – the chances of this actually happening are razor slim.

After all, what is at stake here is not just the short-term survival of Catalonia’s largest banks but also the general health of the Eurozone’s fourth largest economy – and more specifically the sustainability of its ever-growing pile of debt. If roughly one-fifth of Spain’s economy was to suddenly plunge into a deep, prolonged recession, some investors might begin to question the ability of the Spanish government to continue servicing its over €1 trillion (and rising) in debt.

Once those fears spread, it will be very hard to stop the country’s bonds from plunging in value and their yields from soaring, as is already beginning to happen [read: Investors Get Jittery As Spain Enters Whole New World of Pain].

A Dangerous Bluff

In other words, these latest pronouncements from the masters of Spain’s financial universe – like just about every new escalation in Catalonia’s tit-for-tat conflict with Madrid – are a bluff. But as any two-bit poker player knows, bluffs can backfire. They can quickly get out of control and can even have the opposite of their desired effect.

Given its recent past (including the country’s biggest ever taxpayer-funded bailout, criminal behavior by a former IMF president, and billion-euro scams to dispossess pensioners of their life savings), Spain’s banking industry is probably not the most appropriate crisis mediator in the growing rift between Madrid and Barcelona. As such, its pleas to preserve the status quo, of which it is arguably the biggest beneficiary, are unlikely to elicit much in the way of sympathy from many Catalan voters.

According to Artur Mas, the self-anointed leader of Catalonian independence, the recent intervention of Spain’s banking and corporate lobbies – traditionally his closest allies in government – is definitive proof that the only weapon independence opponents have left in their arsenal is fear. And as recent events in Greece have shown, fear alone is not always enough to keep an unhappy, restive populace subdued.

If, in one week’s time, a majority of Catalans decide to drown out the fear mongering and vote for independence — as recent polls have suggested could happen — Europe’s institutions will have a very tricky dilemma on their hands. They can either respond by forcing Madrid to reach a negotiated settlement — something a majority of Catalans support but which the current conservative government in Madrid will be loath to do just months before the do-or-die general election — or it can push Spain’s richest region to the brink of financial collapse, just as it did with Greece.

The problem with such a strategy is that it risks pushing Spain over the edge with it. And at that point all bets are off. By Don Quijones, Raging Bull-Shit.

An extremely high-stakes game of political poker, not just for Catalonia and Spain but for Europe. Read… Is Catalonia About to Go All In?

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  18 comments for “Spanish Banks Warn of Financial Meltdown if Catalonia Votes for Independence

  1. mijj
    September 20, 2015 at 1:34 am

    lol .. the threat is always “financial meltdown”. Can’t they scare us with something original .. Aliens will Invade, or .. Satan will Open the Gates of Hell?

    • NotSoSure
      September 20, 2015 at 9:48 am

      As if some of us are not in financial meltdown already.

    • Pere Ubu
      September 20, 2015 at 5:34 pm

      Well, they already said that an independent Catalonia will be sent to the outer space.

  2. MC
    September 20, 2015 at 3:19 am

    As much as popular sentiment in Catalonia is generally sympathetic to independence (especially in the interior), I very much doubt anybody involved in this saga wants things to go all the way, one way or the other.
    Mas and his supporters know very well unless orders come down from Brussels to negotiate, Rajoy (or the PSOE, or Podemos) will never accept Catalan secession.
    On the other, for all his bluster, Rajoy cannot use force against Catalunya to keep her in the kingdom. Not even Saruman Juncker would allow that.
    The best outcome for all parts involved is a vote rejecting independence with the narrowest of margins. It would save Mas the embarrassment, since he could easily blame fearmongering from Madrid, and it would allow Rajoy on go back on his gymnastics to keep Podemos and Ciudadanos from gaining power, which is what really matters to both Madrid and Brussels. Spain is simply too large and important to be dealt with as Greece and Podemos and Ciudadanos leaders have learned their lessons from the hapless Tsipras.

  3. rich black
    September 20, 2015 at 5:11 am

    To put things into perspective, California accounts for 12% of the US economy. Catalonia accounts for 20% of Spain’s economy. The per capita GDP of Catalonia is about 20% higher than the per capita GDP of greater Spain. The average Barcelona property costs € 710K, while property in Spain costs on average € 236K. It would appear that Spain has much to lose, if Catalonia gains its independence.

  4. Avenpuerto
    September 20, 2015 at 7:04 am

    Perhaps jut a important in some eyes, a vote for independence is a vote for the beloved Barca leaving La Liga

    • Pere Ubu
      September 20, 2015 at 5:37 pm

      As a Barça fan, if this is the price we have to pay to get the independence, it will be rather cheap.

    • Pere
      September 20, 2015 at 6:05 pm

      The main purpose of the club is to serve the country. If it has to disappear or transform it’s not a problem

    • Pere Fort
      September 20, 2015 at 11:19 pm

      The fact that Barça is even mentioned in a serious argumentation (and I’ve heard it in almost all the discussions in Spanish mass media) says a lot -and not exactly a positive lot- of this country… I’m a Barça supporter and definitely that will not change my vote!

  5. d
    September 20, 2015 at 7:29 am

    Catalonia never wanted to be part of Spain.

    The problem has been compounded since Franco, by the fact that Madrid milk’s Catalonia, savagely.

    Catalonia is one of the places in Europe, that could benefit from being a federated state,of Europe.

    Catalonia would probably be willing to trade Madrid for Brussels.

    Madrid need’s to give Catalonia a better deal, Or live with the consequences of not doing so.

  6. Don Kihote
    September 20, 2015 at 7:56 pm

    I support Independence vote for Catalonia.
    They have right to decide whether they want to live with rest of Spain or not.
    Same thing could happen in Italy, France, Belgium and even Germany.

  7. Frank Galvin
    September 21, 2015 at 9:31 am

    The same threats and fears were poured on us Scots last year. My own employer threatened to move our head office to London should we vote Yes for Scottish independence.

    • d
      September 21, 2015 at 5:42 pm

      Difference is your employer wasn’t joking and England is a business and tax supplier, to Scotland.

      Catalonia is a MASSIVE contributor to the Spanish Economy, the threats are hollow as in the case of business repatriation, unlike Scotland, Catalonia would gain, should there be business repatriation.

      The main driver behind the surge in Catalonia nationalism since franco, is that Madrid is milking Catalonia SAVAGELY, the people, just like the Germans, have had enough, of paying for the rest, to have a free ride.

      Scots nationalism, is based in Populism, and the EGO of Nasty hater’s like Salmond and Sturgeon.

      Catalonia nationalism is based in long Injustice, in a principality, that never wanted to, or needed to, be part of Spain. The injustice, has increased since franco.

      In the long term Catalonia can stand alone, Scotland cant.

      That’s why the Peaceful union occurred with RICH England, as Scotland was BANKRUPT AGAIN, but Scots nationalist always choose, not to REMEMBER, that major fact.. .

      • Marga
        September 21, 2015 at 5:52 pm

        As a Scot in Catalonia I can only say, agree on Catalonia, but not on Scotland. History apart, don’t see the rationale of such different present-day conclusions. Scotland and Catalonia are similar – in population and GDP, for example.

        Especially now – what happens in England if Cameron gets ousted by even righter-wingers and Corbyn can’t cope. You may wish to reconsider.

        It has been said that both movements are Lockean Revolutions – see America and its indepedence movement.

      • Dee
        September 23, 2015 at 8:32 am

        As are the Basque. Therein lies the problem. Catalonia and Basque country are the little engines that could in a confederation that can’t.

        • d
          September 23, 2015 at 6:37 pm

          Both would gain from a, Fairly, Democratic, Federated, Europe.

          When you get right down to it, a “Nation State”, is simply a “Robber Baron”, taxing what goes by, and the people in his area, by FORCE.

          Then the force was sword’s, now it is “law’s and Gun’s”.

          Outside Island’s, Borders benefit big and little criminal gangs. The “Police” are the biggest “Criminal Gang”, in the world.

          “Then came the Churches. Then came the Schools. Then came the Lawyers. Then came the Rules. And the dirty old track, was the Telegraph road. Six Lanes moving fast, and Six Lanes moving slow.” App “Mark Knopfler”

  8. Marga
    September 21, 2015 at 5:42 pm

    “If roughly one-fifth of Spain’s economy was to suddenly plunge into a deep, prolonged recession” – well, some would say that Catalonia is already seriously underperforming, and that a lot (not all) of this is due to central Spanish mediocrity and mismanagement.

    What I don’t see here either is the risk to Catalonia if it stays in a country whose government is relentlessly re-centralising, which regularly uses anti-Catalan rhetoric as an electoral weapon, and which has made no inroads into re-founding a highly inefficient state, including a lamentable financial system for the autonomous communities. The left parties are not far behind.

  9. Dee
    September 23, 2015 at 8:26 am

    Funny how the Spanish nationalist government threatened football fans with jail at a recent Barcelona v. Athletic Bilbao match if they jeered the Spain during the match. Both the Catalonians and Basque crowds joined each other and broke into whistling taunts.

Comments are closed.