Wee bit of Contagion? Catalonian default will be seen as Spanish default: Moody’s
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
“An impending train crash.” Those are the words increasingly being used to describe Madrid’s seemingly intractable conflict with Spain’s separatist north-eastern region of Catalonia. The latest flashpoint in tensions is the political show trial of Catalonia’s former president, Artur Mas, and two other Catalan politicians for their role in organizing a purely symbolic, non-binding referendum on national independence in November, 2014.
Mas has been charged with serious disobedience and other crimes for ignoring a court injunction against the unofficial vote, which the central government in Madrid considered illegal. If found guilty he could be barred from public office for up to ten years.
For Catalonia’s separatist movement, the trial has provided yet another PR coup just as popular support for the movement was beginning to wane. Once again, the outside world is being reminded, no matter how briefly, about the region’s national aspirations and the central government’s increasingly repressive efforts to thwart them.
Upping the Ante
Apart from the estimated 3,000 Catalan-based companies that have upped sticks for other parts of Spain, particularly Madrid where business taxes are lowest, the political tensions and uncertainty have had limited direct repercussions on Catalonia’s macro-economy.
The local economy is performing far more robustly than it was two or three years ago, with its GDP growth outperforming the national average, unemployment falling and tourist numbers once again breaking historic records: in 2016 Catalonia drew 18 million visitors, 4% more than the previous year. That’s nearly two and a half times its permanent population and almost a quarter of the total number of tourists that visited Spain last year.
But that could be about to change, what with the simmering war of words and gestures once again reaching fever pitch. As Artur Mas faces the prospect of prosecution for organizing a symbolic popular consultation, his successor, Carles Puigdemont, by all accounts a more committed separatist than Mas, is planning another referendum — one that was initially scheduled for September but which could be brought forward to as early as May.
“If 50% plus one vote ‘yes’, we will declare independence without hesitation,” he said in his New Year address.
For its part, Madrid insists that no such vote will be allowed to happen. It has repeatedly threatened to trigger article 155 of Spain’s constitution, which would allow it to effectively suspend Catalonia’s regional autonomy. It has also fined the two main civil organizations pushing for Catalonian independence, the National Catalan Assembly and Òmnium Cultural, hundreds of thousands of euros for their part in the last referendum.
More ominous still, when Spain’s defense minister until last November, Pedro Morenes, was asked what the army would do if Catalonia organized another consultation, he avoided giving a direct answer: “If everyone does what they are legally bound to do, that situation will not be necessary.”
A Slow-Motion Debt Crash
In the absence of any hope of a negotiated settlement, tensions are sure to rise. For the semi-recovering economies of both Catalonia and Spain, that could be very bad news. Despite representing one-fifth of the national economy and being a significant net provider of funds to Madrid’s coffers, Catalonia can no longer issue its own debt and depends on the central government’s national liquidity fund (FLA, for its Spanish acronym) for about 60% of its funds.
As ratings agency Fitch warned in April last year when it sent Catalonian debt even deeper into junk territory, the region has grave liquidity problems that will require “proactive management” and “close collaboration with the central state ” — something that’s clearly not on the cards any time soon.
Standard & Poor’s cautioned that Catalonia’s management of its short-term risks “represents a much greater risk” than previously thought and it has “serious doubts about the region’s ability to cope with the short-term liquidity pressures it faces.”
This week Moody’s raised the pressure even further when it reminded the Spanish government (and investors in its ridiculously low-yielding debt) that any default on Catalonia’s debt would be interpreted by the markets as a Spanish default. In other words, whence goeth Catalonia, goeth Spain.
Moody’s analyst Marisol Blázquez told Europa Press that the political tensions are reflected in Catalonia’s current rating of ‘Ba3’ (negative outlook), the lowest of all of the ten Spanish regions Moody’s evaluates. “This rating is four notches higher than it would be if it weren’t for the State’s support. If that support wasn’t there, the rating would be not be ‘Ba3’; it would be ‘Caa1′”, Blázquez added. In other words, deep junk.
What most preoccupies Moody’s is the extent to which “the political situation could impact the fiscal situation,” said Blásquez. In the last eight years Spain’s public debt has ballooned from 39.4% of GDP to 99.3%.
Even with historically low interest rates (gracie, Signor Draghi), the price of servicing government debt can get out of control. Between 2011 and 2015 Spain’s central government spent €121 billion – the equivalent of 12% of annual GDP – on interest payments. And still, the debt mountain grows, particularly at the regional level. In 2015 two out of every three euros of new debt created went to the regions.
In an effort to rein in this spending the central government recently created a group of experts with analysts representing each region to study how best to reform Spain’s system of regional finance. Last week the group met for the first time. Each and every region dispatched its representatives, except for one: Catalonia.
And that’s the rub: the more relations sour between Madrid and Barcelona, the less likely they are to see eye to eye on fiscal matters and the greater the chances that Catalonia’s — and by extension, Spain’s — financial situation spirals out of control. Ultimately, Madrid may have the upper hand in this battle of wills, but Catalonia has a strong card up its sleeves: its tick-tocking debt load. And as Catalonia’s vice president, Oriol Junqueras, warned Spain’s foreign creditors and bondholders during a speech in Brussels three years ago, if backed into a corner, it wouldn’t hesitate to use it. By Don Quijones.
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