Catalonia and Spain to Push Each Other into Financial Abyss?

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.

Relations between Airbnb and Barcelona City Council took another turn for the worse following revelations that organized criminals from Russia are making massive profits by subletting apartments in Barcelona to tourists, as locals struggle with soaring rents. Read… Airbnb Just Made Itself Even More Unpopular in Barcelona

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  22 comments for “Catalonia and Spain to Push Each Other into Financial Abyss?

  1. TJ Martin says:

    Sigh … what a mess . And in such a beautiful corner of the world . Yet having a look at the market today … stocks are back on the ascendancy … go figure

    • Cynic says:

      It is indeed one of the most beautiful places on earth: even better inland away from the tourists spots and Barcelona.

      Anyone who is interested might do well to try the area around Poblet: ancient palace/monastery with exquisite cloisters, good easy hill walking with lovely views of mountains, and excellent Catalan wine – an antidote to our sick times! April-May and September-early October are best.

      As for the referendum, many of the those who desire one just hope to kill the matter stone dead, prove to the nationalists that they don’t have a sufficient majority, and get back to real life, which is tough enough. Just as in the Basque Country, actually.

      Only kids who know no better, and old fanatics who imagine that power may at last be in their grasp, really think independence will ‘make Catalonia great again. ‘

  2. Kent says:

    Sr. Quijones,

    Could you provide a brief explanation of how Catalonia’s debt is related to Spains? Does Catalonia have a separate account with the ECB or with Spain’s central bank? Does Catalonia pay into Spain’s national debt?

    By the way, the last time I was in Barcelona I was told that Spain is Catalonia’s South Western province.

    • Wolf Richter says:

      DQ has departed for the mountains, getting some fresh air. So I’ll give it a shot.

      During the euro debt crisis, Catalonia’s finances went from terrible to disastrous, and since the ECB doesn’t buy municipal or provincial bonds, the province was essentially locked out of the credit markets and would have defaulted if the central government hadn’t stepped in to fund Catalonia’s deficits and to service its debts. In other words, the central government, via the FLA, lends to Catalonia.

      Here’s a blast from the past, from 2012, during the peak of the debt crisis. It includes some background on the FLA…

      Spain doesn’t have this money that it lends to Catalonia… so it borrows it since it can issue low-cost bonds that qualify for the ECB’s QE. So Catalonia’s debts are now on the shoulders of Spain. And Spain is getting propped up by the ECB.

      Catalonia is desperately dependent on Spain for funding, and Spain is desperately dependent on revenues from Catalonia to service what are essentially Catalonia’s debts, plus its owns debts. Neither can keep these financial entanglements going without the other.

      • Klaus says:

        Let me add once again a “small” detail.

        While Spain’s economy and revenues are dependent on Catalonia’s (19% of the national GDP, similar to that of Madrid región notwithstanding that Madrid’s population is 30% smaller than Catalonia’s), Spain’s revenues are not dependent of Catalonia’s government.

        How is that?

        Basically all public revenues are collected by the central government which, afterwards, distribute them to the regional governments (including Catalonia).

        So Catalonia government revenues are basically those the central government gives to it. As its regional finances are horrendous, the central government has been also buying its regional debt. Therefore, the central government owns over 60% of Catalonia’s debt AND collects the taxes that afterwards the Catalan regional government uses as revenues for their public spending.

        • Hiho says:

          I take all your money, I give some back to you when I feel like it, and yeah we depend on each other.

          Only in an orwellian double-thinking parallel universe someone could believe that the largest exporter of Spain which also has massive revenues from tourism depents on the other regions to get its revenues. Regions in which by the way half the population works for the state.

  3. mean chicken says:

    “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”

    MSM doesn’t specialize in publishing news anymore, just opinion cloaked as news on behalf of the special interest group(s) that own them.

    Seems like good enough reason for CNN to buy out Twitter, for example, so they may enhance control of the narrative..

    • nick kelly says:

      And suspend the accounts of some person(s) in their interest and the interest of others.

    • Cynic says:


      In Spain, a ‘political solution’ has, for the past few centuries, meant prison, exile, the bullet (used to be the garota -how nice!) and sudden disappearance and assassination.

      Reason and compromise, on the old English model, are conspicuously absent from the Iberian scene.

      It’s all the politics of conviction and cynicism, and the ardent desire to crush your enemies. A bit like the feuding parties in the old cities of Italy.

      Civil liberties, established since the planned end of the Dictatorship, have been considerably eroded by recent legislation.

      Torture in some form is still quite common – never, ever tangle with the police there, any more than you would in Turkey of Pakistan. The courts turn a blind eye to it all, and are in fact complicit.

  4. d says:

    The longer Madrid continues to repress the bigger the mess and more negative the result will be.

    Madrid should use its head and let Catalonia have a non-binding referendum then work from there.

    which if nothing else will reduce the pressure in the balloon.

    Political Ego, seems to be ruling in Spain. AGAIN.

    • Cynic says:

      Again, it’s important to understand that Spain is different.

      This kind of senseless antagonism and lack of pragmatism is meat and drink to Spaniards of nearly all political persuasions.

      That the current government is Conservative, and partly Francoist, does of course make it somewhat worse. Their central tenet is that Spain is One, indivisible. This is completely non-negotiable.

      The most consensual, and sensible, party is the PNV, (Basque National Party) which only governs in the Basque Country – and it is hated, just hated, by the Basque Left nationalists, even more than they hate Madrid.

      Their policy is one of small gains of competency from Madrid, and a recognition of distinct status , awaiting the eventual crumbling of the Spanish state.

      Spaniards are generally most unfortunate in their politicians: but even more so in their habits of mind.

      • Klaus says:

        “Their central tenet is that Spain is One, indivisible”

        These are the first two articles of Spain’s Constitution, massively voted and approved by those in Catalonia:

        1. Spain is hereby established as a social and democratic State, subject to the rule of law, which advocates as the highest values of its legal order, liberty, justice, equality and political pluralism.
        2. National sovereignty is vested in the Spanish people, from whom emanate the powers of the State.
        3. The political form of the Spanish State is that of a parliamentary monarchy.

        Article 2 The Constitution is based on the indissoluble unity of the Spanish nation, the common and indivisible country of all Spaniards; it recognises and guarantees the right to autonomy of the nationalities and regions of which it is composed, and the solidarity amongst them all.

        So I guess that one, indivisible thing…well, is easy to understand

        • d says:

          “These are the first two articles of Spain’s Constitution, massively voted and approved by those in Catalonia:”

          “These are the first two articles of Spain’s Constitution,” Yes

          “massively voted and approved by those in Catalonia:”

          SAYS WHO???

          Those writing up the voting statistics. Say that.

          Those who only allowed votes in favour of the constitution. Say that.

          Those that stuffed the ballot boxes IN FAVOUR OF THE CONSTITUTION. Say that.

          If what you claim, is truly the case.

          Allow the referendum, and make it binding, overseen by independent authority’s from outside the Eu. Madrid wont allow that, as what you claim is in fact NOT the truth. Madrid is too scared to find that out by loosing.

          Simple Fact. Catalonia has been trying to get out of Spain. Since it was dragged into it by Marriage.

        • Cynic says:

          Belief in the sacredness of a united Spanish kingdom pre-dates the Constitution, and goes back at least to the 16th century, and is linked to militant Catholicism and a sense of Holy Destiny.

          ( Even today, the Virgin Mary holds honorary positions on civic boards and in regiments,and her intercession was sought by the government to ease unemployment caused by the 2008 crisis.)

          The Constitution itself was a way of drawing a line under the terrible turmoil and violence (not often understood outside Spain) which accompanied the Transition away from the Dictatorship. There was a real threat of military rule until the early 1980’s, and it still hovers in the background…..

          It was quite an achievement, although it would be a mistake to believe that even those who voted for it supported it wholeheartedly, but it was something and most were so afraid of civil war or a new dictatorship, and so weary, that they voted for it.

          Unfortunately, the Conservatives only seem to remember the rule of law when they refer to the sacred Constitution, not otherwise (notorious and flagrant political and business corruption cases, and secret killings by state-hired assassins).

          This has greatly devalued the Constitution with the taint of hypocrisy, and many will just laugh when it is referred to. The recent destruction of civil rights , eg. it is now a criminal offence to take photos of police committing crimes such as beating people in the street! – only deepen this attitude.

          Again, one must emphasise that Spain is in many ways much closer Turkey or Morocco than Germany, Holland, Britain or even France, in culture and political habits. It is simply not Europe, as Northerners would think of it.

      • d says:

        “Spaniards are generally most unfortunate in their politicians: but even more so in their habits of mind.”

        Yes South America and the Philippines are still paying the price for that.

        • Cynic says:


          It’s similar to the problem which besets Italy in general: a lack of public spirit, and making sure that your little network of family and clients is OK. Hence the utter lack of ethics so often seen in Spanish retail banks which Don Q has reported on so well.

          Public office as a way to fill one’s pockets, nothing more.

          And senselessly vindictive persecution of enemies (the Italians are a little smarter though: ‘Leave the door open for an enemy so they can return as a friend’, wise saying.)

          The other very peculiar Spanish habit is the Death Cult, found in religion and the military (and self-reinforcing) – soldiers who actually want to die.

          It’s the most puzzling of all, as even in the 16th century Spanish allies went on strike and refused to fight alongside them as they were such senselessly aggressive soldiers who didn’t seem to want to live!

          This might all seem a long way from economics and debt problems, but it is all linked…..

  5. Chris Wagner says:

    TBH, I fail to see how C. could trigger S’s default. Look at Greece getting its debt serviced by third parties.

    • MC says:

      Greece’s economy (once the consumption bubble deflated in 2009) is a fraction of Spain: just to give an idea estimated GDP figures for 2016 are $290.3 billion for Greece and $1.69 trillion for Spain.
      This also means that in absolute terms Greece’s debt is a fraction of Spain’s, yet even hinting Greece would need to restructure her debt (something that happened nonetheless) caused carnage and mayhem in the European bond markets.

      Not unlike Italy, Spain is completely dependent on ECB largesse to keep sovereign bond yields ferociously repressed through a combination of direct purchases and LTRO/TLTRO to local banks which in turn gorge on sovereign bonds.
      10Y Spanish sovereign bonds presently yield 1.73%. 10Y US Treasuries presently yield 2.39%. It doesn’t take a financial wizard to understand the ECB is the only thing making the Spanish government solvent.

      Given the sheer size of Spain’s economy even a modest “debt crisis” would be far larger than anything Greece experienced so far, and with the monetary tide turning around the world the results may be unpredictable.

      • Klaus says:

        There is no doubt that Spain, Italy and France are the countries that may bring down the euro.

        Their massive debt are big enough to crumble everything around them.

        However, there is very little chance that Catalonia’s issue is Spain’s straw breaking the Camel back

  6. Hiho says:

    Wolf, you forgot a detail that is the core of the matter (I am catalan so I am certainly not impartial but here we go).

    There is a serious unbalance between the tax revenue that the central gov collects in Catalonia and the amount of money that later goes back via inversions. It is true that every single country has mechanisms to redistribute the surpluss of some regions to deficitarian ones, but in our case that is just unsustainable, it goes beyond belief… they are just draining out ur economy.

    To make matters worse, the central gov is not willing to invest in key infrastructured which are vital to keep the export machine going, such as “el corredor mediterraneo” which is a net of roads and train rails that go along the meditertanean coast into france. Madrid prefers to dump the money into uselesd radial infraused highways and the high speed train (which is a subsidized high-end taxi for the very few).

    To give you an example, you cannot go by train from Barcelona to France without a stop in the border, as the rails’ witdh are not the same. Ludicrous.

    To make matters worse, the 2 other richest regions in Spain: basque country and navarra, have they own fiscal regime and so not give a single penny to the whole of the country… Catalonia and other regions of the mediterranean levante are alone carrying the burden.

    That being said: I would Vote no to independence… we just want a fair system within Spain. Do not forget also that there is no such a thing as Spain. Ever since 1850 aprox therr have been 2 spains, and we the majority of the catalans know very well with which of these 2 Spains we would like to stay.

    Clue: mariano rajoy does not represent it.

    • Cynic says:

      ‘Spain’ is rather like the Holy Ghost – equally it exists, and it doesn’t, depending on who you talk to! :)

      I am very fond of Catalonia, in fact my Basque ancestors helped to found the preceeding Kingdom of Aragon, fighting alongside Jaime the Conqueror.

      I do hope this all ends reasonably.

  7. Harkonnen says:

    It is very simple to explain. There will NEVER be an independent Catalonia.
    There was already a civil war on 1936. As result, the idea of other nations within the state or independent was slashed. Still is. Even in Catalonia. The establishment in Catalonia is deeply entangled with the Spanish. Do you think that they flourished after Franco died? No, they were raised to their positions by Franco apparatus and ever since they have been sharing the booty, reaping Catalans and other Spanish alike.

    These clashes are just fireworks that keep Spanish people entertained, going around showing their preferred flag and repeating their side of the propaganda arguments (see comments on railways connections) rather than looking into the awful economic status and the decisions leading to them. If any independent movement is allowed to become serious, it will be only to make sure that it is smashed again, destroying all created hopes and setting the example for others, Greece/ Syriza style. The financials will not matter, as they don’t matter in Greece.

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