Markets won’t ‘panic’ over Catalonia

Spanish government bonds and stockmarkets are not panicking over Catalonia because any secession by the region would have limited effects on Madrid’s finances and economy, a leading analytical firm has said.

Capital Economics in London said there is a good reason that Spanish bonds and shares haven’t been badly hit because the economic fallout would be limited.

“This makes sense to us. After all, even if Catalonia were permitted to secede at some point in the future, say, as a result of a ‘yes’ vote in a legal referendum following a revision of Spain’s constitution, it would probably be required to take on its share of Spain’s debt.

“In this case, Spain’s debt-GDP ratio wouldn’t change much. It is also likely that the region’s fiscal transfers to Spain would only be phased out gradually,” the economists said.

Noting that Spanish bonds have missed out on a rally for eurozone debt and that the share prices of Spanish-focuses SMEs have fallen, the economists nonetheless believe that “the hit to growth in Spain is likely to be small”.

However, Catalonia vice president Oriol Junqueras said his regional government has a weapon to use in its independence struggle — leveraging Spain’s need to make debt payments.

Spanish prime minister Mariano Rajoy will eventually have to let the pro- secessionist government of Catalonia have control of tax collection because it needs its help to ensure the Spanish state can sustain its €1.2tn public debt, said Junqueras, who is also the region’s economic policy chief.

“We are convinced that the Spanish government doesn’t have any interest in appearing like someone who doesn’t honour their commitments with third parties,” said Junqueras, who is in charge of budget and economy policies. Those third parties could include bond investors,” he said.

Junqueras has a way to go in convincing bond investors that his reading of power politics is more astute than Rajoy’s. Last month, Catalonia’s power over budgets took a leap backwards when the state’s budget ministry seized control of public payments and set safeguards against the use of state money to fund separatism.

The region’s parliament last month passed a ‘transition’ law of steps to separate from Spain which leaves the responsibility to service its share of the national debt up to future negotiations. While the law was struck down by Spain’s constitutional court, the Catalan parliament hasn’t rescinded it.

Additional reporting Bloomberg


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