“Sometimes you have to keep the black swans in mind.”
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
In recent days, JP Morgan Chase, Goldman Sachs and ING, have warned about the political situation in Spain’s richest region, Catalonia, where a banned referendum on national independence is scheduled to be held on Oct. 1.
JPMorgan advised its clients to reduce their exposure to Spanish government debt. Although the bank does not foresee Catalonia achieving independence, it believes that developments in the region could lead to a resurgence in Spain’s risk premium.
In the last five weeks the premium (the cost differential of Spain’s 10-year bonds vis-á-vis Germany’s) has increased from 101 to 121 basis points. It’s still not much compared to the 630 points that it reached at the height of the Euro Debt Crisis in 2012, but it’s enough to get analysts on Wall Street and in the City of London to sit up and pay attention.
Economists in London at Bank of America Merrill Lynch warn of two possible scenarios.
“First, although it is not our central scenario, if we saw a great amount of [social] discontent, markets could react more than they have until now. Nothing has happened yet, but there have been several very tense situations.”
For example, last Wednesday when Spain’s Civil Guard raided Catalan government buildings and arrested senior government officials, which sparked a flurry of spontaneous protests outside Catalan government buildings. The elected government of Catalonia, backed by an overwhelming majority of Catalans, is determined to proceed with a referendum that has been prohibited by Spain’s supreme court.
Spain’s knee-jerk response was to dispatch cruise ships to Barcelona filled with police reinforcements drafted from other parts of the country. Cries of “Viva España” (Long live Spain) and “Á por ellos!” (Go get them!) accompanied them as they left their barracks.
As of today Spain’s National Court is investigating people who protested last Wednesday outside Catalan government buildings for crimes of sedition, which are punishable with prison sentences of up to 15 years.
Madrid has also demanded that Catalonia’s autonomous police force, the Mossos d’Esquadra, is made completely subordinate to Spain’s Interior Ministry. Their first big job will be to prevent anyone from getting within 100 meters of a ballot box on Sunday, the day of the vote. The Mossos have so far refused to comply and its chief of police, Josep Lluís Trapero, has said he will not attend any meeting in any Spanish government building.
In other words, tensions between the two sides are not exactly easing.
And political instability is no longer just a threat in Catalonia. In the second scenario postulated by the Bank of America Merrill Lynch analysts, the current crisis could also affect the stability of the central government led by Mariano Rajoy.
The current central government is in a minority and the main opposition party [PSOE] is not very keen to work with it. It is a very fragile balance and if the Catalan situation is not handled correctly, it could lead to a vote of no confidence that might end up bringing down the Spanish Government.
That could prompt a revival of the market jitters that were seen at the end of 2015 and in mid-2016 [a period during which two elections were held to form a government]. In recent days, the PP’s coalition partner, the Basque National Party (PNV), which supported the budget of 2017, has said that it is unwilling for now to support the 2018 budget. Without its support, it will be very hard for Madrid to pass the budget.
The financial pain in Catalonia and Spain has already begun. According to Carlos Perelló, country manager for Spain and Portugal at French investment bank Natixis, Catalonia is already suffering a negative market impact from its decision to move ahead with the referendum on national independence despite .
“We and our partners believe it is not a very rational decision to invest capital in (big infrastructure) projects in Catalonia despite the fact that they offer much higher returns,” Perelló told Spain’s financial daily Expansión. “This is because of the political situation, even though the most likely outcome is that nothing much changes in the region. Sometimes you have to keep the black swans in mind.”
Josep Borrell, a socialist politician, former government minister and ex-board member of recently bankrupt green energy giant Abengoa, claims that in the City of London, which he recently visited, the biggest concern is over the potential impact of political developments in Catalonia on the financial health and stability of the two banks most exposed to the region: Barcelona-based Caixabank, Spain’s third biggest financial institution, and Banco de Sabadell, the fifth biggest.
One risk is a region-wide bank run, as people, both in Catalonia and the rest of Spain, begin withdrawing funds from the two banks, either out of fear that the money could dry up or as part of a boycott. Both banks have already threatened to move their head office, with Caixabank preferring Mallorca as its Plan-B location and Banc de Sabadell, Madrid.
If Catalonia unilaterally declares independence from Spain, they could be cut off entirely from ECB funding. That, according to the Bank of Spain — hardly the most impartial observer — would set in motion a corralito-like event. As happened in Argentina in 2001, bank accounts would be frozen and customers would be able to access only a very small fraction of their funds. And probably not in euros.
It would be catastrophic for Catalonia’s economy. But the rest of Spain’s economy and financial system would be hit very hard too if two of its five biggest banks in its richest region were effectively put out of business at a time that it’s sixth biggest bank, Banco Popular, just collapsed and was taken over by its biggest bank, Santander, and its eighth biggest bank, Liberbank, is beginning to wobble too. By Don Quijones.
Spain’s “ships of repression” are coming to help out. Read… It Gets Ugly in Catalonia
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I guess the real question is whether Catalonia can force fiscal devolution out of Madrid and if they cant presmably the Basques will demand the same. That will hobble Madrid’s tax take. It will undermine their spurious claims over Gibraltar and it will offer Catalonia a chance to become a tax haven within the EU.
The Basque Country won’t seek to break away: their policy is for gradual assumption of sovereign powers within a Spanish Confederation, with no overt confrontation with Madrid.
While supporting Catalonia in public, in private they are saying that this has all been a tremendous error of strategy.
48% is not an Overwhelming majority.
An overwhelming majority of Catalans WANT TO VOTE in a referendum. Many of them are, or at least were, against national independence. And if the Spanish government had allowed them to hold a referendum a year or two ago and there had been a civilised debate on all the issues involved, in particular the economic issues (as happened in Scotland and Quebec), an overwhelming majority of Catalans would have almost certainly voted to stay. Now it’s very difficult to tell.
Sorry but it’s not as simple as you make it sound. Nice try…
1. Cataluña is nothing like Scotland or Quebec. Nothing, not a bit. Cataluña has been part of Spain for more than 500 years. Before that it was part of the Crown or Kingdom of Aragon. And that is only ONE of the many differences between Scotland and Quebec.
2. The Spanish constitution prohibits a referendum to separate from Spain. The overwhelming majority (really) of people in Cataluña voted in favor of that constitution in 1978.
3. The politicians running this political coup (and that is exactly what this is, a coup) have broken the law in many ways and many times. They are composed of an odd combination of radical right wing separatist supremacists and a bunch of radical communist, anarchist, separatist supremacists. These groups are far from the majority of the people in Cataluña. These groups have controlled the News media in Cataluña for years, feeding the young and the uneducated with their own version of Putin stile fake news, brainwashing them into believing they have been oppressed for generations. Nothing further from the truth. In fact, these radical crazies have been oppressing Spanish citizens and businesses for years. They do not allow Spanish kids to learn or speak Spanish in School and they prohibit Spanish businesses from having signs in Spanish. That is just one small example of how the government in Cataluña oppresses Spanish citizens in their own country.
4. Cataluña is the Autonomic Region in Spain that enjoys the most freedom and receives the most benefits from the central government.
5. The radical crazies running this ridiculous disaster in the making are provoking the Spanish Government. No country in Europe or the EU support this nonsense. This will end up in violence (unfortunately) and lots of people prosecuted and in prison (hopefully). The Spanish government has been extremely patient…many people in Spain and in Cataluña believe much too patient. They should have stopped this a long time ago.
6. Please don’t spread the false notion that Cataluña is the richest region in Spain. If the central government didn’t keep bailing Cataluña out, the region would be bankrupt. Period, end of story.
7. The government in Cataluña has been one of the most corrupt governments in Europe since the Pujol family took over.
I could go on and on and on, bit all those are FACTS. Anything else is fake news.
This constitution thing keeps getting trotted out by people who do not want the folks in Catolonia to vote in a non-binding referendum.
But in Sept. 2011, the Spanish Parliament approved a constitutional reform about public finances and priorities concerning debt payments. It took practically no time to change the constitution under financial pressure from the debt crisis.
A constitution is a living document. As the Spanish Parliament has demonstrated, it can get updated when they want to. But they don’t WANT to now. That’s how you should have phrased that.
Well you just got crushed, guti.
Let me add this: the fact that Catalonia has never had its own state is not relevant at all (apart from being false). It is the most idiotic argument ever heard in this discussion.
Finally, about Catalonia being bailed out: well genious, imagine that I take all your income and then I give you some crumbs.. I would be helping you? Or robbing you?
In which parallel universe would an industrialized exports-oriented economy with a thriving tourist sector have to be bailed out?
This is the best collection of arguments if you want to shoot yourself in the leg. Brilliant.
Oh, snap. It’s the ol’ all caps FACT. That’s when you know for sure it’s a fact. Lower case facts are not facts.
The Spanish Constitution was voted in by people who were desperate to settle matters peacefully, under the threat of a resumption of the Dictatorship if they didn’t.
The years after Franco’s death were very turbulent and violent – mercenaries were hired by the Right to murder opponents, etc – and a solution had to be found.
The idea that a Constitution may not be changed or challenged is a nonsense, legally and historically.
That’s a very fair and accurate assessment by Don Q.
The repression being put in place by Madrid – swarms of state police, veiled threats of the use of the army (‘we hope we won’t have to’!) subversion of the role of the Catalan police, blatant lies about ‘violence’ (never specified) is an insult to all Catalans and their sense of national dignity.
According to my cousins, even those who were against independence, or even voting if it was an illegal act , are now thinking about a gesture to show what they think of Madrid and the PP.
Where my cousins live, even those who are displaying the national flag of Spain are not being molested in any way.
There is no statesmanship in what Madrid is doing: Rajoy is playing to his own Party gallery.
‘ Eternal Spain’: hypocritical, corrupt, authoritarian and just plain dumb.
“There is no statesmanship in what Madrid is doing: Rajoy is playing to his own Party gallery.”
My thoughts also, Eurotrash politicians are not this stupid, even Club-Med ones.
Franco will be laughing in his grave, not even his Fascist, were this inept.
it was for Donald Trump
Lets them vote and we will see. Today 80% wish to vote and 80% of them in favour of a Catalan Republic. Thise are facts!
DQ
Always find your posts interesting & informative.
You, and many other reporters, refer to Catalonia as Spain’s richest region. I’ve frequently read Catalonia is 16% of Spain’s population and 19% of it’s economy – that sounds close to average, not necessarily very rich.
Is Spain’s economy as evenly distributed as those numbers might imply?
Other than tourism, what are Catalonia’s major industries?
Hi Chip,
Catalonia is Spain’s richest region in nominal terms since it still provides the largest share of Spain’s GDP pie, albeit by the slimmest of margins (18.9% versus Madrid’s 18.8%). On GDP per capita it places 4th out of 17 autonomous regions, behind Madrid, the Basque Country and Navarre. Catalonia also accounts for just under 25% of Spain’s most important industry these days, tourism, and 25% of Spanish exports. Its capital, Barcelona, is the fifth most visited destination in Europe and one of the most popular choices for trade fairs and business conferences.
In other words, to put it lightly, it would be a major loss. As even Spanish economy minister warned a few months ago, Spain could lose 25-30% of its GDP if Catalonia seceded.
Messi and Barcelona FC.
Hi Don,
Another great article.
Question for you, why aren’t we seeing massive share price reductions in the Spanish Banks and other Spanish Businesses in relation to this issue?
I would have expected as such with the 1st October being so close.
Best Regards
Steve
Rough times ahead, both for Cataluña and Spain.
Undoubtedly.
Should the independence occur, it would have dire consequences for both sides.
Catalonian goods are produced by international companies and mainly sold in Spain.
Will they be able to maintain their sales records?
What currency are they going to have?
Can Cataluña become a tax haven with a no euro currency, a radical left government and a divided population?
Will the tourism be enough to overcome the rest of economic destruction that may arise under those circumstances?
So would I, Steve, especially with Liberbank trying to come up with an extra half billion euros of capital. The only reason I can give for it is mass complacency backed by a firm bedrock of ECB support. There is a general belief that Madrid holds all the cards in this dispute since it has the full power of the law on its side and the full arsenal of state repression at its disposal.
But the more cards you hold, the fewer you should need to play.
Thanks Don,
I suppose Liberbank is similar to Carige in Italy…not a major issue size wise even if it does need 500 million euro’s.
The biggest issue with Liberbank is the shorting of its shares which they’ve tried to stop.
From the outside looking in you can hold all the cards in the world but anything which looks like being anti-democratic to the Catalan people will swing the vote in the favour of independence.
Best Regards
Steve
“As happened in Argentina in 2001, bank accounts would be frozen and customers would be able to access only a very small fraction of their funds. And probably not in euros.”
So they’re threatening to steal their money?
Its good to be too big to fail!
The Catalonia flag is one wild design. It was very present for 3 weeks of the tour de France and not as much further south in grand tour of Spain? Perhaps Catalonia has a international Svengali?
DQ, I have read all of the above and all the comments, and I still do not understand why Catalonia is so keen on independence from Spain. Google is not much help, either. Mucho talk about language, historical independence in the 1100s, 1300s, purported economical superiority (not really, right?) are the most common themes.
What is the real psychology behind the independence movement? Is it an offshoot of the great housing bubble and aftermath? Some strange form of economic nationalism?
I would say that the most important source of popular grievance was Madrid’s reneging on a 2006 agreement to grant the region more fiscal autonomy and greater recognition of Catalan culture and language. Effectively the region was granted what most of the people wanted, and then over the course of a few years it was watered down and then summarily taken away.
Til then Catalan independence was still a fairly fringe cause. The fact that it coincided with the worst years of the economic crisis hardly helped matters.
All of the most important events and developments of the last 12 or so years are very well summarised in a timeline recently published by Politico:
http://www.politico.eu/article/catalonia-referendum-independence-timeline-how-did-we-get-here/?utm_content=buffer91cef&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
Sorry Don one more question reference Spanish Banking.
Aside of bankrupt Banco Popular being taken over in July its all gone very quiet on the news story.
What physically has happened-come out in the press since then reference the Popular story?
Santander has taken over the bank and many of Popular’s shareholders and junior bondholders have sued Santander for the money they lost. To try to keep a lid on things (and not lose too many of BP’s customers) Santander has offered some of the affected investors super high-risk bonds that are probably just marginally better than nothing. Not sure how many took them up on the offer.
In an even more interesting twist, it seems that the turnaround of Abengoa might now be in jeopardy thanks to a recent court ruling, but that’s an article for another day.
Hi Don,
After your Abengoa comment yesterday had a look at their accounts what a complete and utter mess.
Huge Losses-huge project debts.
Look forward to your article.
Again, spot-on by Don Q.
Essentially, the perfect compromise was reached: it would have de-fused all tensions and left the Independence-or-Die nationalists as an isolated minority – fanatical, but without broad support.
Those concessions were not honoured, and a campaign of anti-Catalan agitation and propaganda was started by the Right. It is very crude and mendacious, but effective: Catalans are now seen by many as the ungrateful trouble-makers and traitors in Spain .
In addition, the future looks so tough for most Catalan youngsters, after the disaster of 2008, that they are drawn to independence as a possible solution to their predicament – this repression by a conservative Madrid govt. will only cement that feeling.
If you had major interests in Catalonia, wouldn’t you want to have your own country? It’s why there is any separatist movement. It’s why people in various parts of U.S. states want to have their own state.
The smaller the autonomous political unit, the more it functions as a plantation for the richest people in that unit. Think 5 families in Hawaii. Think 6 families of Kentucky. Most southern states are controlled by several families who own the banks, the newspapers, most of the land, the industries, etc. Northern California, for all the wealth and diversity of its tech companies, is tightly controlled by the trust companies here. There are still PLENTY of trust fund brats in this area, and their trust companies get first debs on investing in companies like Google. Do you seriously think they wouldn’t like their own state? They would LOVE it.
Let me break it down in the context of the EU. Previously, there were plenty of small fish, and to bribe/coerce them, you had to stop in many capitals. Now, you only have to stop in Brussels and have them do the job.
That’s why I did not have an opinion on Catalan independence because I did not see where this was going. Until they sent in the cavalry…
Not correct in this instance (although the argument about vested interests is valid).
There is a genuine ground-root movement for independence in Catalonia.
And the actions of the oafs in Madrid are making it daily stronger.
These irredeemables have been assimilated, there is no escape.
This is the only situation out there at the moment, stupider than the DPRK and the idiot verbally sparring.
Luckily for the Catalonian citicens this has no possibility of morphing into a thermonuclear conflict.
Which bring’s the why question, to this Spanish situation.
Is perhaps the PP trying to engineer the situation in Catalonia into something that can be used to win an election, or be totally defeated. Either is better than the current situation (after 2 elections) where the PP can not even pass a budget, let alone govern without the support of the PNV
Yes, it’s a vote-catching and distraction exercise (Corruption? what, us?)
Combined with old-fashioned bloody-minded arrogance and authoritarianism of a true Iberian stamp.
Patriotism is the last refuge of the scoundrel, indeed.
With the banksters and globalists relentlessly strip-mining the wealth of formerly sovereign countries and peoples, aided and abetted by the political prostitutes of the Establishment parties and status quo, I foresee multiple black swans as nationalists and populists – many of whom will be vile opportunists, unfortunately – rise up in resistance. What happens when a single northern European EU country refuses to keep putting its taxpayers on the hook to cover the trillions in bad loans the banksters have made to the PIIGS? What happens to the ECB’s speculative bubbles when a critical mass of European taxpayers get fed up with the financial chicanery and currency debasement of the “former” Goldmanites at the ECB and start demanding their own sovereign currencies back?
So far the Spanish 10-year bond does not reflect much of a risk premium – although as Wolf has pointed out, perhaps this is because the ECB’s deranged bond-buying (QE) means fundamentals no longer matter.
http://www.marketwatch.com/investing/bond/tmbmkes-10y?countrycode=bx&mod=MW_story_quote
Is there any analogy between Spain:Catalonia and US:Puerto Rico?
I don’t think so … except that Puerto Rico just had its 5th independence referendum in as many decades, and nothing happened.
The one this year gave these 3 options: becoming a state of the US, independence/free association, or maintaining current territorial status.
97% voted for the status quo. Voter turnout was very low (23%).
These things heat up only when repression becomes a factor, as in Catalonia.
Hi Don,
Bankia CFO on tv this morning, they mentioned Catalonia and he just shrugged his shoulders – hardly registering.
A bigger banking story is Deutsche Bank downgraded by Fitch. Within their turnaround plan obviously there’s an increase in revenue which isn’t happening. If Deutsche aren’t seeing the increases in turnover then the smaller banks will be in a similar boat who all have turnaround plans.