Bank shares plunge. Money is already on the move.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Spain’s biggest political crisis of a generation, which has led to the complete breakdown of communication and understanding between its government in Madrid and the separatist region of Catalonia, is finally beginning to take its toll on the country’s financial markets.
Spain’s benchmark index, the Ibex 35, slumped nearly 3% following its worst day of trading since the Brexit vote last June. Spain’s 10-year risk premium — the differential between the yield on its 10-year bonds and the yield on Germany’s 10-year bonds — soared to 129 basis points. And that’s despite the fact that the ECB continues to buy Spanish debt hand over fist.
But it is the banks that have borne the brunt of the pain this week. On Monday, the first trading day after the independence referendum, they lost €4.84 billion in market value. Over the past five trading days, shares of the two biggest Catalan-based banks, Caixabank and Banco de Sabadell, have plunged respectively, 9% and 13%.
So tense is the situation that the CEOs of each bank felt compelled to release a statement today reassuring customers that they have all the means and tools necessary to protect their interests. Their contingency plans include the option of abandoning their base of operations in Catalonia and moving elsewhere — to Madrid in the case of Sabadell and Mallorca in the case of Caixabank.
But it wasn’t just Catalan banks that were caught up in today’s rout. Important Spanish banks with somewhat less exposure to Catalonia also saw their shares plunge. Santander, Spain’s only global systemically important bank, was down 3.8% on the day’s trading; BBVA, Spain’s second bank which has important operations in Catalonia after acquiring the failed saving bank Catalunya Caixa in 2015, fell 3.6%; and Bankia was also down 3.6%.
Standard & Poor’s today put Catalonia’s credit rating — at B+/B, it’s already deep into junk — on review for a downgrade of one notch or more, “if we believed that escalating political tensions between Catalonia’s government and Spain’s central government could put in question the full and timely refinancing of Catalonia’s short-term debt instruments or undermine the effectiveness of the central government’s financial support to Catalonia.” The threat of default moves a step closer.
Two days ago, Moody’s warned that the ratcheting-up of tensions between Spain and Catalonia has negative credit implications for Spain because it complicates the process of legislating policy and putting together its 2018 budget.
It may have taken a long time, but investors are finally beginning to sit up and take notice of the events unfolding in Catalonia. As I reported yesterday, neither side of this conflict is showing any willingness to deescalate tensions.
The King of Spain, Felipe VI, speaking in a televised address on Tuesday night admonished the Catalan government for its “inadmissible disloyalty” and called on the Spanish state to restore constitutional order. Not once did he mention the word “dialogue” or the hundreds of people injured in the Spanish police raids on voting stations on Sunday.
In Brussels today the first Vice-President of the European Commission, Frans Timmermans, categorically ruled out the possibility of the EU playing a mediating role in the dispute. He also defended Rajoy’s use of rough justice on Sunday, arguing that every government has an obligation to uphold the rule of law and (pay close attention, EU citizens) “that can sometimes require the proportional use of force.”
At any moment Rajoy, with the King’s explicit support, could activate article 155 of Spain’s constitution, which would allow the central government to force the Catalan government to obey the laws of Spain. To that end, the Rajoy administration dispatched two military convoys to Barcelona today to beef up its coercive capabilities in the city as well as provide logistic support to the Civil Guard and National Police based there.
In other words, the markets are right to be jittery.
Both sides in this conflict are poised on the point of no return. Unless they can be pulled back from the brink, the next step that either side takes will bring the State institutions of Spain into direct confrontation with those of Catalonia. Once that happens, Spain’s political system and economy will be in uncharted territory, and the jitters we’ve seen in recent days could quickly give way to panic.
People in Catalonia are already moving their money. While some of the wealthiest are shifting their funds out of Spain altogether, most people are moving their money from their bank branch in Catalonia to a branch somewhere else in Spain. The money stays within the same financial institution, which even in the case of Caixabank and Sabadell is registered in Spain. As such, the money is moving around but most of it’s not actually leaving the system.
But it won’t take much for spooked investors to begin moving their money out of Spain en masse or for desperate Catalan depositors to take their savings out of the bank and deposit it under their mattress or somewhere slightly more imaginative. The sight of Spanish armed forces laying siege to Catalonia’s parliament building — just five blocks from where I live — will probably suffice.
If things spiral that far, Spain’s financial system will face its biggest test since 2012, the year that Bankia collapsed and Spain’s risk premium reached a staggering 630 basis points. And if the recent collapse of its sixth biggest bank, Banco Popular, just four months ago is any indication, it could have serious difficulty weathering the sort of disruption that appears to be on its way. By Don Quijones.
Will Spain trigger Article 155 of the Constitution? Read… How Did Things Get So Bad in Catalonia?