For market investors, the Catalonia crisis is no crisis

Even though Catalonia’s bid for independence may be Spain’s worst political crisis in decades, it has been no Grexit, Brexit or even Frexit for foreign investors.

For market investors, the Catalonia crisis is no crisis

Even though Catalonia’s bid for independence may be Spain’s worst political crisis in decades, it has been no Grexit, Brexit or even Frexit for foreign investors.

Overseas holders of Spanish stocks and bonds — and indeed owners of eurozone assets in general — have been quick to dismiss comparisons with a succession of rolling sovereign debt crises that hit the euro zone between 2010 and 2012.

Even though Spain’s wealthiest region has a bigger economy than Greece, Portugal and Finland, relatively unfazed Spanish and Catalonian assets to date shows markets are treating the crisis over Catalonia as a largely domestic issue with few if any systemic sovereign, banking or euro-wide threats. While Spain’s blue-chip Ibex equity index is about 7% off the year’s highs, it is still up more than 10% for 2017 as a whole.

The Spanish government’s 10-year borrowing costs as well as their risk premium over German equivalents, are lower than where they started the year. The euro exchange rate has barely budged. Catalonia’s debt level — at around €77bn — is around quarter that of Greece.

In addition, €52.5bn of that, just over two-thirds, is owed to Spain, a further €8.17bn to resident financial institutions, €6.02bn to the rest of the world, and €10.03bn to others, according to the data from the Spanish central bank.

The international exposure is too small to create ripples across the eurozone even in the event of a Catalonian default, and the effect on Spain would also be limited. Catalonia’s total debt to the centre represents just 4.75% of Spain’s total debt as of the end of 2016.

Independence on its own would neither lead to a sovereign default nor to an exit of an existing eurozone member, which caused consternation earlier in the decade given fears of sovereign redenomination risk, related banking stress and legal precedents that seeped across the bloc.

Economic confidence and business risk for Spanish firms and households may be an issue at the margins for equity investors, but this is largely cushioned at the moment by a booming world economy and the fastest economic expansion in the eurozone in more than six years. The chances of secession itself were always slim. One of the leading investors in Catalonian bonds believes the region’s bid for independence was always legally doubtful.

“Greece was a very different story — the very existence of Greece as part of the monetary union was called into question. In Catalonia, independence was never constitutional, there was no legal basis,” said Mark Dowding, senior portfolio manager at BlueBay Asset Management, which has been a long-term investor in Catalonian debt.

If ultimately Catalonia’s independence was always unlikely, the rest was just a “storm in a teacup” for financial markets, Mr Dowding said.

Markets did attempt to re-price different elements of the Spanish financial world — but few of these moves were durable.

The gap between Catalonian and Spanish bonds widened rapidly to its highest level in over a year after the banned October independence referendum, as investors fled from the troubled region’s debt. But now it has not only erased those losses but shrunk to its smallest since mid-July, at 250 basis points.

Spanish banks that had been based in Catalonia, Banco de Sabadell and Caixa Bank, took outsize hits during the worst of the crisis but both since moved their headquarters out of the region and their stock prices are still up more than 20% year-to-date.

“This is very different from other crises the eurozone has faced recently,” said Nadia Gharbi, an economist at Pictet Wealth Management. “This is very much an internal issue and a national question for Spain.”

“Spanish equities have been the category that is most affected; Spanish bonds have seen a relatively modest impact; and the euro has been mostly affected by the ECB,” said Nicola Mai, an analyst and portfolio manager at Pimco, the world’s largest bond investor and an owner of Catalonian debt.


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