Catalonia’s Independence Strife Turns into Financial Showdown

Will Spain’s central government blink (again)?

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

Madrid’s standoff with Spain’s north eastern province of Catalonia, which plans to hold a forbidden referendum on national independence on October 1, grows more and more complex by the day. Just in the last week alone the following developments have taken place:

  • Spain’s Civil Guard has raided Catalonia’s parliament and government HQ as part of its investigation into political corruption in the region. As new research has shown, this investigation forms part of a broader police operation that has served as a means for Spain’s governing People’s Party to spy on political rivals.
  • Catalonia’s government has replaced the region’s chief of police with a die-hard separatist. It has also purged the cabinet of any members perceived as not fully committed to the separatist cause.
  • Deloitte published its annual barometer of Spanish businesses according to which 74% of business leaders believe that the independence of Catalonia would do serious harm to Spain’s economy.
  • Support in Catalonia for national independence is on the wain, according to a new poll, with 49% opposing independence, and just 41% favoring it. That said, only 67.5% of respondents said they still plan to vote on Oct. 1. Most of them will be nationalists.

Madrid will do everything it can to stop them. The Rajoy government has warned this week that anyone who participates in the purchase of ballot boxes for the referendum could be criminally prosecuted.

The Rajoy government has also warned of serious consequences if it is discovered that public money has been used to organize the referendum. Those consequences could include a temporary freeze on the Autonomic Liquidity Fund (FLA) — a low-interest credit line from the central government that has kept Catalonia’s economy (and the economies of Spain’s other autonomous regions) afloat since Spain’s debt crisis.




Spain doesn’t actually have this money, so it borrows it by issuing bonds that qualify for the ECB’s QE, which pushes down their yields and the costs for Spain. Now, roughly 80% of Catalonia’s debt (about €75.5 billion) is on the shoulders of Spain. And Spain, whose public debt over the last ten years has mushroomed from 40% of GDP to 100% of GDP, is being 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 own debts. Neither can keep these financial entanglements going without the other.

All the while, the situation with Catalonia’s home-grown debt gets more and more precarious. In recent days the value of debt issued by Catalonia has slumped to new lows. The yield on debt scheduled to mature in 2024 rose to 4.7%, five times the yield on equivalent Spanish securities. Catalonia’s debt has junk credit ratings: Moody’s has placed it three notches below investment grade; Standards & Poor, four notches, and Fitch, two.

By now the lack of liquidity in the Catalan autonomous debt market is absolute. “There is nothing, nobody is buying, nobody is selling,” says Javier Ferrer Delgado, a director at Ahorro Corporación.

Catalonia issued most of this debt, now €13 billion, before the debt crisis began biting really hard in Spain, in 2011-12. Catalonia’s finances went from terrible to disastrous. Since the ECB doesn’t buy municipal or provincial bonds, the province was essentially locked out of the credit markets. Indeed, it would have defaulted if the central government hadn’t stepped in to fund Catalonia’s deficits and service its debts.

Now Madrid is threatening to turn off the liquidity tap. But will it actually follow through?

The Rajoy government already set a similar ultimatum last year and failed to make good on it. It’s easy to see why: if the Finance Ministry decides to suspend payments to the region, it could trigger a liquidity crisis in a regional economy that accounts for 20% of Spain’s national economy, represents almost 25% of Spain’s vital tourist sector and is growing faster than any other region. It could also put further strain on Spain’s already out-of-control financing of its regions.

Two out of every three euros of new debt created last year went to the regions, which increased their total debt exposure by 10.3%. The worst offenders — Extremadura and Aragon — increased their respective debt piles by over 15%. But the biggest regional debt overhang belongs to the regional government of Valencia, which at last count owed the equivalent of 41.3% of its GDP.

Spain’s Socialist Workers’ Party, a somewhat uncomfortable partner in Rajoy’s fragile coalition, wants debt relief to be an integral part of the coalition government’s reforms to Spain’s regional financing system which is fast spiraling out of control. The debt relief would also apply to Catalonia.

“Catalonia has a very important debt and the State must help to resolve it, because [the debt] is getting bigger, and you have to raise even more debt so that the institutions in Catalonia do not collapse and can provide the services needed,” argued socialist MP José Luis Ábalos.

Clearly not all of Rajoy’s coalition partners are quite so keen to take a purely adversarial approach to the Catalan problem. That could present the government with a serious challenge when it finally decides to intervene in the region. That said, even if Rajoy’s Popular Party wanted to provide debt relief to Catalonia — which it certainly doesn’t — any plan to write down regional debt would meet an immovable wall of resistance in Brussels, which is already deeply concerned about the continued growth of public debt in Spain. In the meantime, the clock to October 1 continues to tick down, and there’s still nothing remotely resembling a semi-workable solution in sight. By Don Quijones.

Markets are still complacent. Read… Catalonia and Spain to Push Each Other into Financial Abyss?




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  29 comments for “Catalonia’s Independence Strife Turns into Financial Showdown

  1. nick kelly
    Jul 23, 2017 at 8:20 pm

    Outside of Ukraine and North Korea I think this the scariest thing going on.
    My eyes bugged when I read that the Feds had raided Catalonia’s Parliament.

    In Canada we’ve had some military response in the past to violent Quebec separatists, but that was a response to the murder of a British diplomat etc. There was never a raid on Quebec’s PQ parliament and they were allowed to hold their referendum, which they lost in spite of massive ballot box tampering. (The number of spoiled ballots exceeded the margin of victory. ‘No’ votes were disqualified for the most trifling reasons. I’ve talked to a scrutineer who was there)

    The EU has major leverage with Spain, it’s keeping it afloat.
    The EU end- game is political. It was conceived to prevent another French-German war, by gradually unifying the two.

    If it wants to practice conflict resolution in a troubled member state, this looks like a place to begin.

    • Peter Hamann
      Jul 23, 2017 at 8:36 pm

      ¡MY eyes bugged at Spains public debt being equal to the GDP! Factor in the unemployent rate… I agree, EU conflict resolution teams had better be boning up on their spanish!

    • Gershon
      Jul 24, 2017 at 8:20 am

      Nick, speaking of scary things going on that you’ll barely read about in the corporate media, here’s another potential geopolitical risk scenario rife with potential for miscalculation and escalation into full-scale war between two nuclear-armed powers.

      China in 2017 is like Japan circa 1938.

      https://www.rt.com/news/397299-china-india-military-border/

    • Willy2
      Jul 24, 2017 at 11:46 am

      – I wouldn’t worry too much about North Korea. Up to now there has been A LOT OF scaremongering but no one in that region (China, North Korea, South Korea, Japan and the US) has an interest in letting the situation escalate into a war. There’s simply too much at stake for too many players.

      • DV
        Jul 25, 2017 at 11:27 am

        Sure, the North Koreans now have nukes and, out of nowhere, they now have ICBMs! I guess that is the Chinese response to American encroachments. So next thing you now, they sell those ICBMs to Iran.

        But I would not be so sure about the Chinese intentions. A fugitive Chinese billionaire warns that the Chinese strategy is to get the US into war either with North Korea or Iran , or both. And it looks like the Chinese are preparing for the war, building all kinds of shelters and fortifications along the border and amassing troops there.

        • d
          Jul 27, 2017 at 9:01 am

          “So next thing you now, they sell those ICBMs to Iran”

          How far behind teh cue ball are you.

          the DPRK ICBM,Nuke program and the Iranian Nuke ICBM program are in fact 1 program. they hav ebeen for some time.

          Iranians are present at every DPRK Nuke and ICBM test and have been since the programs became 1 under fat boy kim.

          This basically public Information was in the white-house long before the Iranian deal was concluded by the previous clowns administration.

          This knowledge is what makes the Iranian nuclear deal so bad.

          It is not if iran goes nuclear armed, it is when they declare how many they have, probably hours before they use them.

          The problem with Iran, Pakistan, DPRK, and to some extent India,is that they are building Nuclear Weapons systems, they intend to use, not just wave at others.

      • Jim Graham
        Jul 27, 2017 at 6:32 pm

        “”There’s simply too much at stake for too many players.””

        We probably have the least at stake – as long as none of those rockets hit US…

  2. Wilbur58
    Jul 23, 2017 at 11:15 pm

    For me, this is the money shot:

    “Because [the debt] is getting bigger, and you have to raise even more debt so that the institutions in Catalonia do not collapse and can provide the services needed.”

    Right, because it simply isn’t an option to have the debts go unpaid and then witness the consequences. Why if you do that, then gravity stops working, photosynthesis is shot, food disappears, hydrogen and oxygen particles can no longer bond, etc.

    • Jonathan Vause
      Jul 23, 2017 at 11:43 pm

      of course it depends who the money is owed to – if it’s Spanish households then defaulting is likely to lead to a deeper depression/higher unemployment than they have already as the people who suddenly realise they aren’t as rich as they thought they were adjust their spending levels accordingly, or, if it’s held by spanish banks then we’re looking at a financial crisis as banks which are already teetering on the brink become properly insolvent and require bailing out at taxpayers expense, with all the usual effects on real output and unemployment, or, if it’s held by foreigners/the ECB (obviously the best case scenario in theory) then the question becomes what leverage do they have over you/what sources of funding can they turn off? when your national economy is as entangled with the rest of Europe as Spain’s is then its very difficult to start breaking all the rules without experiencing some very unpleasant blowback, as Greece has already found out – of course the problem ultimately is that the Spanish government can’t print its own currency

      of course none of this changes the fact that Spanish, Italian, Greek and Portuguese debt levels are unsustainable and will have to be written down, either by agreement or involuntarily, at some point, but unless the Spanish government is willing to leave the euro, restore the peseta and declare an immediate moratorium on all external debt repayments, we haven’t reached that point yet

      • nick kelly
        Jul 24, 2017 at 12:39 am

        Re: its own currency. It is no problem at all for Greece to print drachmas. The only problem is: will they buy anything outside Greece?
        The idea often expressed in these parts that you can’t go broke in your own currency has to deal with the fact that all African countries print their own currency and some are so absolutely broke you can only phone collect from them.

        Greece literally ran out of money after the government’s grand- stand referendum play and guess what, Greece doesn’t make insulin. The Red Cross had to scramble to get sources on credit. Some agreed to take IOU’s
        Switzerland’s CIBA: cash.

        The problem ultimately is not that Greece doesn’t print its own
        currency, it’s that the economy doesn’t support the level of public spending.

        But there is this to be said for Greece going back to the drachma, and Italy going back to the lira. It will be the mother of all shock treatments. It would be impossible to borrow externally in local currency, and interest rates to borrow in $ or euros would at least triple.
        It will instantly require a massive cut in each countries bloated, inefficient public sector.
        So if you want to rip the band aid off, go for it.

        But remember that Greece had a post- WWII civil war.

        • Jonathan Vause
          Jul 24, 2017 at 3:17 am

          well that isn’t the argument in favour of leaving the euro – the problem is that club med isn’t cost competitive with northern europe, hence the trade deficits and increasing private and public sector debt. a new drachma would probably devalue by about 50% more or less immediately, which will close the trade deficit by necessity, as you say, and that will hurt greek households as consumers (real imports will decrease) but benefit them as workers (real exports will increase). the idea that an economy ‘doesn’t support the level of public spending’ doesn’t make any sense unless spending is higher than 100% of gdp – that might well have happened in some of the african countries you reference but it isn’t true in greece (is gov spending as a percentage of gdp higher than in scandinavia?) when a country is locked into a fixed exchange rate system there is a big problem if your wages start to rise faster than in other countries, because while nobody complains when wages go up it’s very difficult to grind wages back down to competitive levels afterwards without an extreme recession and very high unemployment for years on end

        • Manuel Barradas
          Jul 24, 2017 at 4:06 am

          “Never before had so many people been hired by the state, with such salaries, pensions and benefits—to the point where the average government job paid almost three times the salary of the average private-sector job. An egregious but not isolated example was the national railroad company, which had annual revenues of €100 million against an annual wage bill of €400 million, on top of €300 million in other expenses. This is how the average state railroad employee came to earn €65,000 a year.”

          https://www.amazon.com/Modern-Greece-Everyone-Needs-Know%C2%AE/dp/0199948798

        • d
          Jul 27, 2017 at 9:06 am

          “But remember that Greece had a post- WWII civil war.”

          Which russia instigated, then refused to support with Heavy weapons or manpower as the US strongly objected.

          This “Greek” civil war was not very “Greek” really.

          As it was an “Unofficial engagement” all the US personnel involved only got a Green Hornet decoration for their combat tours in greece.

  3. Gershon
    Jul 24, 2017 at 8:17 am

    Wolf Street is one of the very few media outlets, none mainstream of course, that is doing an excellent job of covering the profound ramifications of this story.

  4. Gershon
    Jul 24, 2017 at 8:30 am

    Meanwhile, the same clueless or co-opted economists who get their paycheck signed by the corporatocracy claim Greece is “on the brink of returning to sustainable growth.”

    Which means further decline and a fifth bailout is assured.

    http://www.telegraph.co.uk/business/2017/07/23/greece-brink-return-sustainable-growth-economists-believe/

    • Nicko2
      Jul 24, 2017 at 9:07 am

      Greece is the vanguard of EU in the Med. They won’t be allowed to collapse.

      • Jonathan Vause
        Jul 24, 2017 at 10:39 am

        what does that even mean? if you don’t agree to do what the european commission and council tell you to do, they won’t give you any money, as varoufakis already discovered. and greece has already collapsed, unless you think that 25% unemployment and 25% drop in real gdp is a normal adjustment to structural imbalances

        • Kasadour
          Jul 24, 2017 at 12:41 pm

          Maybe he means the vanguard of MENA migration (human capital) for the EU.

          I was in Greece a couple years back. Wonderful country, but the economic situation is extremely tenuous and it’s made manifest everywhere from the accommodations to the food quality, quality of life, mood, up-keep, general expectations, everything. I can only imagine it’s gotten worse.

          I wish the Greek people would end its association with post-modernist Europe, and her disgusting politics, and go back to the simple and traditional way of life the Greeks have always known and lived. They’d be so much better off in the long run. But greed did them in.

        • Stevedcfc72
          Jul 24, 2017 at 1:00 pm

          Agreed Jonathan,

          The same is happening in Poland today, don’t start changing laws or you will see the European Commission start to take action.

  5. Gershon
    Jul 24, 2017 at 8:40 am

    Spanish 10-year bond isn’t showing any undue alarm about Catalonia – yet.

    http://www.marketwatch.com/investing/bond/tmbmkes-10y?countrycode=bx&mod=MW_story_quote

  6. Kasadour
    Jul 24, 2017 at 12:28 pm

    Why doesn’t Spain just put Catalonia up for sale to the highest bidder? /

    If I were Catalonia, I’d default just for spite, for Spain using this corruption investigation as a pretext for spying.

    I’ve said it before: Spain needs Catalonia more than Catalonia needs Spain, but barely. Like that saying: if I owe you $1000 and I don’t have it, I’m in trouble. But if I owe you $100,000,000 and I don’t have it, you’re in trouble – something like that. They’re all a bunch of greedy a$$holes.

    What an economic cluster of shit they’ve mutually gotten themselves into.

  7. JB
    Jul 24, 2017 at 3:13 pm

    DQ : ? And Spain, whose public debt over the last ten years has mushroomed from 40% of GDP to 100% of GDP, is being propped up by the ECB.”

    This scenario seems to have played out with other nations also. What was the cause ? was it an increase in govt’ spending or maybe a reduction in revenue. ? thanks

  8. michael w Earussi
    Jul 24, 2017 at 10:18 pm

    There’s no seeming end to this scenario. So what happens 10 years from now when Spain’s debt is 200% of GDP? Debt has the ability to go up forever and never be paid off. I don’t understand the EU’s purpose in prolonging this farce, not just in Spain but in Greece and Italy as well. Without massive debt write off none of these countries will ever recover.

    • Jim Graham
      Jul 27, 2017 at 6:40 pm

      Who ends up being burned by the write off???

  9. d
    Jul 27, 2017 at 9:12 am

    I sometimes wonder if the current administration in Madrid is fanning the flames in Catalonia to divert Much attention from other much worse issues facing it.

    The Administration in Madrid on seems to display this gross level, of pigheaded ignorance and ineptitude, with Catalonia.

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