Investors Fret as Noose Tightens Around Catalonia’s Economy

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Dream of Independence Descends into Nightmare

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

Investor fears are on the rise south of the Pyrenees as Catalonia, Spain’s richest region (pound for pound), descends into political chaos and Spain’s central government threatens to cut off funding to the region. “This is a genuine economic tragedy” that “could ruin Catalonia,” laments Josep Bou, the president of Catalonia’s Business Association and unapologetic unionist. “There is a complete lack of governance” and Catalan society is becoming increasingly “divided” and “polarized.”

Junk Bond Status

The rating agency Fitch heaped further pressure on Catalonia by downgrading its credit rating from BBB- to junk-bond status BB after the region’s parliament approved a resolution this week to begin the separation from Spain. The historic vote gives the regional assembly 30 days to legislate for two pillars of a putative new state – Catalan tax and social security authorities. The vote also opens the door to direct political disobedience of Spain’s Constitutional Tribunal, which this week unanimously agreed to suspend the Catalan independent process.

Fitch based its decision to downgrade Catalonia on the likelihood that tensions and confrontation will continue to escalate between Catalonia’s regional government and Spain’s central government. The rating agency notes that Madrid has a broad range of measures to deal with the crisis. The problem is that whatever measure it adopts, “it is likely to result in increased tensions between the two governments and possible civil disruption in the region.” Catalonia could see its liquidity dry up if Madrid decides to follow through on its threat to withdraw the region’s credit line, the so-called Fondo de Liquidez Autonómica.

The government in Madrid has already begun tightening the noose. According to Catalonia’s Economic Councilor, Andreu Mas-Colell, Spain’s Finance Ministry has just imposed a budgetary fine of €1.3 billion that dates back to 2013, giving the Catalan administration just 10 days to execute budgetary cutbacks worth over a billion euros – a huge sum for a region that is already struggling to pay its bills. If Catalonia does not comply with the Finance Ministry’s demands, Madrid will have the perfect excuse to suspend the region’s autonomous status and intervene directly in its economy.

A New Radical Beast

Meanwhile, cracks are beginning to open up in Catalonia’s independence movement. The region’s president Artus Mas remains hostage to the anti-capitalist CUP party, which on Thursday levered its king-making (or breaking) powers to reject, for the second time since September’s election, his bid to be re-elected as Catalan premier.

If the pro-independence CUP and the Junts pel Sí coalition – whose main members are Mas’s own Democratic Convergence of Catalonia (CDC) party and the Catalan Republican Left (ERC) – fail to reach an agreement before January 10, fresh regional elections will automatically be called. And that would probably spell the end of Catalonia’s pro-independence coalition.

CUP spokesman Antonio Baños did not reject outright the possibility of reelecting Mas. “We will not fall into the trap of becoming divided, because we have a shared goal,” which, he added, was “very close” to fruition.

Mas’ reelection will ultimately hinge on how far he is willing to accommodate CUP’s myriad policy demands, which include a Catalonian exit from the euro, the suspension or reversal of the government’s recent privatization programs, renegotiation of the region’s debt, total rejection of Madrid´s evil “Gag Law” (a damn fine idea), the holding of a referendum on national independence, a complete ban on the use of GMOs (Spain accounts for almost half of all field trials of genetically modified crops in the EU), and the establishment of a basic income.

Most of these policies are totally anathema to a pro-euro neoliberal like Artur Mas and the CDC party he leads. The problem for Mas is that right now he probably needs CUP a lot more than CUP needs him. The question is: how much is he willing to sacrifice to preserve his political leadership of Catalonia’s independence movement?

In 2012 the Economist’s Giles Tremmet presciently warned that by nailing his colors to Catalonia’s independence movement in a last-ditch effort to salvage his own political career, Mas had jumped on a tiger he could not fully control. Now, the tiger, it seems, has unseated its rider. If the rider wants to get back on, it will be on the tiger’s terms. And the tiger is now a much more radical beast.

A Gathering Exodus

Since Artur Mas took office in 2011, Catalonia has witnessed a net outflow of businesses to other parts of Spain, in particular Madrid [Businesses Flee Catalonia, Foreign Investment Plunges, as Confrontation with Spain Comes to a Boil]. The latest company to up sticks is Suez Environnement España, the Spanish division of Suez GDF, the world’s biggest utility company, which moved its Spanish head office from Barcelona to Madrid in October.

The firm made the move despite its strong, historic ties to Catalonia: Suez is the exlusive shareholder of Barcelona’s water utility company Agbar while Catalonia’s biggest bank and former Agbar shareholder, La Caixa, is second largest shareholder of Suez.

Suez’s relocation should serve as a stark reminder to Catalonia’s pro-independence factions that businesses – especially multinational businesses – don’t like political uncertainty. They particularly don’t like governments bent on renationalizing industries or assets they have acquired.

As the Financial Times warns, the potential economic consequences of or a sharp escalation in tensions between Barcelona and Madrid or a break-up of Spain would be devastating for both Spain and Catalonia, creating grave political and legal uncertainties and doubts about the viability of public finances on both sides of the divide.

To prevent such an outcome, Catalonia’s pro-independence parties need to take big a step back from triggering a profound crisis, while Spain’s premier Mariano Rajoy needs to begin treating what is essentially a political crisis with political solutions.

Unfortunately, the debate on Catalan independence, both in Catalonia and the rest of Spain, is growing more polarizing by the day. In Catlalonia support for complete secession grew to 41.1%, up from 37.6% in June, and at the expense of more moderate formulas like a loose state model or increased powers of self-rule without actual independence. In other words, it may already be too late for cool heads to prevail. By Don Quijones, Raging Bull-Shit.

Passos Coelho, who was until Tuesday Prime Minister of Portugal, knew “what to do.” After signing the €78-billion bailout, he embraced the Troika’s agenda with abandon. Public spending was slashed, taxes were hiked, wages were cut, and public assets and services were privatized. But now there’s a price to pay. Read… Is the Troika About to Lose Control of South-Western Europe?

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  2 comments for “Investors Fret as Noose Tightens Around Catalonia’s Economy

  1. Keith
    November 15, 2015 at 8:51 am

    People will do anything to escape the Neo-Liberal agenda.

    I am thinking of declaring my house as an independent state, it seems like the only way.

  2. John Lee
    November 17, 2015 at 9:23 am

    Funny Fitch didn’t downgrade Spain at the same time huh? If Catalonia leaves, there goes the only golden egg laying goose sustaining all of Spain. So there’s no risk on the other side of that equation? No political agenda there.

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