• Catalonia has 16% of the Spanish population
  • It makes transfers worth 20% of Spanish GDP
  • A split will see Spanish debt and equities collapse
  • Catalonia may see its GDP decline by 30%

The main market development, after Catalan President Carles Puigdemont decided to retreat from pressing the independence button and sought dialogue with Madrid was bonds issued by Generalitat de Calalunya and Spain improved. This was also the case for the IBEX 35. However, 5-Year CDS for the Kingdom of Spain still trade at 8 bps above the level at the start of the month.

Despite 90% of the participants in the referendum signalling a desire for independence the President decided not to pull the trigger. Why so? What happened in the hour-long delay on Tuesday evening?

The official word from Barcelona is that Catalan leaders called a meeting to discuss the situation. Surely that is not the full story, and one suspects that input from the European Union (EU) was an active agent. Certainly, the EU have several sovereign problems at hand:

Brexit…Germany trying to form a government…Italian elections (May 2018)… Greece again

So, it would be no surprise that the EU will be working the phones in a frantic manner behind the scenes to stave off a split in the Eurozone’s fourth largest economy.

Spanish government holds crisis meeting

Spain’s national government is holding crisis talks after the Catalan leader signed a suspended declaration of independence and called for dialogue with Madrid.

Spanish Prime Minister, Mariano Rajoy is aware that world saw the harsh and hard treatment of Catalans that looked to peacefully express their opinion and so he may feel that he must temper his hard line and use dialogue to prevent independence.

However, giving way on too much ground will not be easy for Puigdemont and if he is unable to find a compromise between Madrid and Barcelona Rajoy may well opt to impose direct rule over the semi-autonomous region.

Such a move would be unprecedented. It would lead to civil unrest and a deterioration in the asset value of Spanish debt and equities. It will probably shave off any recent gains the Euro has enjoyed.

Be under no illusion that the crisis within Spain is over…it is just starting and my concern is that Rajoy feels if he gives a little ground to the Catalans now, they will want more later. So, I do see any way in which Madrid really wants to compromise. Even if there are more talks with the Catalans.

Rajoy has no majority in the Cortez and needs to look strong. Therefore I expect he will only accept a total backdown. That would be foolish for he knows that is something the Catalans cannot and will not accept.

Spain’s Deputy Prime Minister, Soraya Sáenz de Santamaría, accused Carles Puigdemont of plunging the region into fresh uncertainty, adding that his speech on Tuesday evening was that of someone:

“…who doesn’t know where they are, where they’re going or who they want to go there with…”

She also appeared to rule out any negotiations, saying:

“…Dialogue between democrats takes place within the law, respects the rules of the game and doesn’t make them up as it goes along. …”

Catalan economy and significance to Spain

Catalonia is a highly industrialized land with a nominal GDP in 2015 of €200 Billion (the highest in Spain. Per capita GDP was €27,000, behind Madrid at €31,000, the Basque Country €30,000, and Navarre €28,000.

Catalan independence would be a severe blow to Spain and would hole the sovereign below the waterline as the region contributes €224 Billion or 20% of national GDP to the national economy and yet has just 16% of the population.

Business Insider claimed that the region would quickly gain about €16 Billion per annum in the case of a split, given they would no longer have to pay taxes or transfers to Spain. This would then result in a loss of about 2% to the Spanish GDP on an annual basis.

Strip that out and what is left of Spain implies there would be no way the remainder of the nation could avoid a debt crisis. Panic would set in the market for Spanish debt. Literally a “Hispanic Panic”.

In 2015 year, the GDP growth was 1.4% cf. Spain at 1.7% but most worryingly Catalonia’s long-term credit rating is BB i.e. it’s classed as non-investment grade according to Standard & Poor’s. Catalonia’s rating is tied for worst with other autonomous communities of Spain.

Catalonia is far from secure

Catalonia’s debt in 2015 was the highest of all Spain’s autonomous communities, reaching €13.5 Billion, i.e. 38% of the total debt of the 17 autonomous communities. However, it is the most prosperous of Spain’s 17 regions and accounts for approximately 20% of Spain’s economy, benefiting from tourism, exports, manufacturing, and industry.

In recent years there has been a negative net relocation rate of companies based in Catalonia moving to other autonomous communities of Spain. In 2014, for example, Catalonia lost 987 companies to other parts of Spain (mainly Madrid), gaining 602 new ones from the rest of the country.

Several banks and major companies have announced they will move their legal headquarters from Barcelona to Madrid, and the constitutional crisis could take a toll on the Spanish economy if the stalemate continues.

In the event of independence, Catalonia will not be assured of acceptance into the EU and as such a hard border would be established between it and the rest of Spain leading to a loss of jobs, income and wealth for both Catalonian and the Spanish population.

Catalonia could take a severe hit, as 35.5% of Catalan exports are to the rest of the Spanish market. The new sovereign state would also have pay to create new structures such as (embassies, a central bank, army and so forth. Not an expense to take lightly.

Earlier this month, Spanish Economy Minister Luis de Guindos claimed that Catalonia could see its economy shrink by 25 to 30% and its unemployment double if it splits to form a separate state.

So be careful what you wish for.

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