Markets are still complacent.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Even if you take into account the ECB’s binge buying of public debt in the Eurozone, the degree of complacency of market players over Catalonia’s worsening ties with the Spanish government — and any potential financial fallout — is surprising. Spain’s northeastern province can no longer issue its own debt, which is in deep junk territory, and depends on the central government’s national liquidity fund (FLA) for about 60% of its funding. Moody’s warned if Catalonia defaults, given the debts it owes Spain, markets would see it as a Spanish default.
Fitch Ratings warned in April that Catalonia 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….
About 85% of residents of Catalonia want a referendum on independence, according to the latest poll by El Periodico, a Barcelona-based newspaper that doesn’t back independence. Many of the respondents to the survey do not want independence either; what they want is a say on the matter.
But that’s out of the question, says Madrid. It would be in direct breach of Spain’s constitution — a constitution that Spain’s governing Popular Party has itself breached a number of times in recent years.
Last month, the New York Times waded into the debate with an editorial urging Madrid “to find a political solution rather than relying on the judiciary’s restrictive interpretation of the Constitution to punish Catalan efforts for greater autonomy.” The best outcome, according to the editorial, would be to allow the referendum to go ahead, and for Catalan voters to reject independence — as voters in Quebec and Scotland have done.
Sounds reasonable enough. And it’s true that if the Catalans were ever given the chance to define their future democratically, a majority would probably choose to stay within the fold of the Spanish state, if only to maintain membership of the Eurozone. But caving in to Catalan demands for a referendum is not an option for Prime Minister Mariano Rajoy who knows full well that defending the country’s territorial unity is a vital vote winner for the party’s core supporters.
In Catalonia, policy makers are no less intransigent. The governing coalition has staked everything on the issue of independence, to the extent that it almost resembles a single-issue multi-party party. Surrendering now would rob it of all remaining sense of purpose. It would also amount to electoral suicide. Even many moderate Catalan nationalists now believe that the only way to win meaningful concessions from Madrid is to push it to the edge of the abyss. The more radical elements want to go a step further, pushing it over the edge.
The abyss is largely economic and financial in nature. Without Catalonia, Spain would be bankrupt. As Columbia University Professor of Economics (and fervent Catalan separatist) Xavier Sala i Marti recently pointed in an interview on Catalan television, Spain would be unable to continue servicing its debt, which currently represents 100% of GDP. That, of course, includes the contribution of Catalonia, which represents 16% of Spain’s population and 19% of the economy. It is Spain’s biggest exporter, and despite all the uncertainty clouding its future it is growing faster than just about any other region.
Catalonia’s separatists are determined that the referendum will go ahead. The regional government just introduced a law intended to extract the region from Spain’s legal system, in a bid to circumvent the risk of elected officials facing legal consequences if they arrange to hold the vote. Catalonia’s former president Artur Mas was convicted of disobeying the Spanish judiciary by holding a non-binding consultation on national independence in 2014, and subsequently barred from public office for two years.
The proposed reform to disengage Catalonia from Spanish law will be put to the regional parliament in August. If passed, the terms of the vote would allow for independence “within 48 hours” if the referendum is in favor, the region’s leading newspaper La Vanguardia said.
Xavier Garcia Albiol, the head of Prime Minister Mariano Rajoy’s conservative Popular Party in Catalonia, has branded the reform as “a coup d’etat dressed up as democracy.” As for Rajoy himself, he has promised he “won’t allow a single act that could harm the unity and sovereignty of Spain.”
The markets seem to believe him and are eerily calm about the prospect of direct, perhaps even violent, intervention by Madrid in Catalan affairs. “The legal mechanisms the Spanish State has at its disposal to prevent the referendum are so clear and obvious” that hardly anyone attaches importance to the recent ruling from the Catalan government that it will hold the referendum on October 1, says Société Générale’s head of Global Finance Iberia, Arturo Alonso.
Certainly, the costs for Spain of servicing its debt are held down by the ECB’s continual efforts to prop up Europe’s sovereign debt markets. The government of Spain has issued issued €34.2 billion of bonds during the first six months of 2017, compared to the €30.7 billion it issued during the whole year 2016.
But markets, led by the ECB’s bond-buying program, are ignoring Catalonia’s worsening ties with Madrid and the possibility that Catalonia could, if pushed hard enough, default on its debt — something representatives of its government have already hinted as a possible last resort.
This is a fragile web of financial interdependence that Spain — and by extension, the EU — can ill afford to see broken. Yet as each day goes by, the gulf separating Spain from its north-eastern province grows a little larger. Soon, it could be unbridgeable. By Don Quijones.
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