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?