Markets price new risk as Catalan stalemate looms | Business | Economic and financial news from a German perspective | DW


After the Catalan government declared that 90% of the population had voted in favor of independence in the October 1 referendum and national authorities refused to accept its legality after a sometimes brutal crackdown, the markets opened up Monday to what they hate the most: uncertainty.

“Unlike the UK, Spain’s 1978 constitution clearly prevents a division of the country,” Eric Oynoyan, London strategist at BNP Paribas, told DW.

“And the main problem in the short term will be that it will be very difficult for the government to get the 2018 budget approved and it will use the 2017 budget because the small parties do not want to give their votes to the PP”, Oynoyan mentioned.

Spanish Finance Minister Cristobal Montoro said last week that he would not present the 2018 budget plan at last Friday’s cabinet meeting as planned. The Catalan crisis has opened a new rift between the executive of the People’s Party (PP) and the Basque Nationalist Party (PNV), whose support the minority government needs. The main opposition Socialist Party (PSOE) refuses to support the PP on this subject.

“Whether independence will materialize remains uncertain. What is clear is that Spain has entered a deep political crisis,” the global chief strategy officer told Reuters news agency. of debt and rates of ING, Padhraic Garvey.

In equity markets, Spain’s IBEX fell 0.8% as domestic banks fell sharply. Shares of Banco Sabadell and Catalonia-headquartered Caixabank were the worst performers, down 4% and 1.9% respectively.

Spanish Prime Minister Mariano Rajoy during a press conference at the Moncloa Palace in Madrid on October 1

The “what ifs”

“If the Catalan president follows the referendum law and unilaterally declares independence, then we are entering uncharted territory in the history of Spanish politics,” Ioannis Sokos, European rates strategist at Nomura, told DW.

“Especially if Madrid’s response goes through Article 155, which can suspend regional government in any autonomous region of Spain. The official statement from Brussels supports Prime Minister Rajoy and reminds everyone that the territory that leaves would end up outside the EU, so if we just extrapolate the current position of both sides, then it’s hard to think of a resolution anytime soon,” he continued.

An economist from the University of Zaragoza, who chose to remain anonymous, told DW that the results will depend on what the government of Catalonia does in the coming days.

“If he continues on the illegal path, his autonomy will be suspended and the problems will continue on the streets for a few weeks. But independence will not succeed,” he said.

If the regional government organizes regional elections (early December), the result could be another victory for voters who oppose independence. “But if the separatists win more seats (like in September 2015), the problem will persist,” he continued.

“The government of Catalonia will try to buy time and delay any decision as late as possible, while the central government will continue to do the minimum, which is worrying,” he added.

too much debt

At this point, that’s an important assumption to make – and one that the markets are loath to make – but if Catalonia were to go ahead with independence, the economic outcome would likely hinge on debt issues.

  • The first option is that Madrid would demand that an independent Catalonia assume 19% of its debt: this is the same proportion that the region contributes to GDP.
  • The second option is if the reallocation of the debt were to correspond to the figure of 16% of the population.
  • Third option, current national spending of 11% for the region – which would turn Spain’s debt-to-GDP ratio to unsustainable levels. It’s just under 100% now and some are already wondering how Madrid would cope with their payouts if rates go up.

If the national government tries hard to oppose a Catalonia that declares its independence and therefore refuses to conclude a debt transfer agreement, then its debt-to-GDP ratio could climb to around 125%.

Catalonia is the third most indebted region in Spain, after Valencia and Castilla La Mancha.

Spanish police prevent people from entering a polling station in Barcelona on the day of a referendum

Spanish police prevent people from entering a polling station in Barcelona on the day of a referendum

Take off the wires

“I think he has reached the stage where some form of external mediation is needed in order to force both sides to the negotiating table for real dialogue and to find a middle way,” said Caroline Gray, senior lecturer in Politics and Spanish at Aston University. in the UK, said DW.

“In terms of debt, you can’t compare the levels of the Catalan government and the Spanish central government,” Gray said.

They do not have the same powers and part of the debt taken on by Catalonia is also calculated according to Spain’s debt levels, she added.

“If you compare the Catalan public debt to the public debt levels of other regional governments in Spain, you will see that the Catalan government is actually one of the most indebted regional governments, with very high regional debt levels” , said Gray.

Catalonia has been excluded from international debt markets since 2010, when the scale of Spain’s regional debt crisis became apparent and investors decided that investing in regional debt was too risky.

“That was one of the huge sticking points between the Spanish and Catalan governments,” Gray said.

Infografik Karte Wirtschaftsmotor Katalonien ENG

“The Spanish government argues that Catalonia got so into debt due to unnecessary spending, while the Catalan government argues that it contributes too much of its income to the rest of Spain and would not have contracted so much debts if he could have kept all the taxes raised in his territory. These views are both very black and white, and the reality is a complex combination,” said Gray.

Analysts believe Catalonia’s independence could depreciate Spanish 10-year government bonds relative to their German counterparts. Spain’s yield spread over Germany on 10-year debt could widen to between 350 and 400 basis points, from around 120 currently.

Yields on government bonds rose 7 basis points to 1.69% on Monday, stretching the spread with benchmark German equivalents to near its widest in nearly four months.

Rating agencies have assigned a low and speculative rating to Catalonia, which would not allow it to borrow directly from the financial markets and would leave it dependent on loans issued by the Spanish state.

rich region

Catalonia’s regional product is about 200 billion euros ($228 billion), according to the Public Diplomacy Council of Catalonia, or about 20% of Spain’s 2013 GDP of 1.04 trillion euros ( $1.17 trillion).

Catalan residents make up around 16% of the country’s population, but contribute 20% of Spanish taxes and then receive 14% of government spending.

Catalonia’s GDP is around that of Denmark.

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