Catalan Vote May Spur Uncertainty, Weigh on Spanish Bonds

Secessionist parties may win a slim majority in Sunday's regional election.

Catalan Pro Independence Rally
Photographer: Juanjo Perez Monclus/Bloomberg

Catalan’s electorate goes to the polls on Sunday, in a vote the region’s leader has framed as a de facto referendum on independence.

Polls show the pro-secession parties winning enough support to spur further uncertainty in the months ahead with some suggesting the possibility the groups may even win a slim majority. Few analysts though believe secession is probable, saying the region may instead secure greater autonomy following discussions with the national govt. after the general election in December.

The vote takes place on Sept. 27 from 8 a.m. local time; polls close at 8 p.m., first exit polls immediately after.

What does the vote mean for markets?

Rising political risk is one reason cited for the turnaround in the fortunes of Spain’s govt bonds even as economic data continues to show improvement; Spanish bonds now yield more than their Italian counterparts.

That trend could continue beyond Sunday’s result, Rabobank says.

  • Expect wider spreads vs BTPs if the pro-secession joint list wins an outright majority as that would mean political tensions between Madrid and the regions remain a key headline risk for Spain, Citigroup analyst Peter Goves writes in a client note; widening may be limited by Spain’s strong fundamentals.
  • Citigroup’s base case is outright independence is unlikely given ideological differences between the parties, implications for EU membership and likely resistance from Madrid.
  • While Spain’s fundamentals may win the day again and Bonos may start to recover into yr-end, moves in 2012 show spread can go much wider before then, Soc Gen says.
  • Nomura analysts say risk of Catalan independence may remain as lingering market concern after Sunday, even though there is a very high bar to that risk materializing; spreads may widen again if separatist parties are successful.
  • RBS macro credit strategist Alberto Gallo says further spread volatility after Sunday’s vote would be a buying opportunity for Spanish credit as the result isn’t a threat to Spain’s unit.

What's the latest?

  • Ser poll says pro-independence Junts Pel Si to get 61-65 seats, just shy of the 68 seats needed for a majority; Junts pel Si to win 65-66 seats and CUP to secure 9, according to El Mundo poll; Metroscopia poll Wednesday shows Catalan independence parties set for majority.
  • Rabobank’s poll of polls suggests the two pro-independence groupings will secure ~48.4 percent.
  • Mas told Onda Cero radio earlier this month he’d like to continue working with other pro-independence parties in the lead up to national elections in December this year.
  • Antonio Banos, CUP candidate for Catalonia’s presidency, told El Pais his party won’t back Mas for regional president.
    •  Rajoy says Mas is lying to Catalans about cost of independence.
    •  Catalonia has been able to tap markets and depends on Spain’s rescue fund for regions to finance itself, Budget Ministry said.
    •  Spain’s two largest banking associations, the AEB and the CECA, say Catalan secession would pose serious legal risks to lenders in the region.
    •  Catalan banks would struggle to tap ECB with secessions Bank of Spain’s Linde says.

Who's who?

  • Junts pel Si is a pro-independence coalition bringing together Catalan president Artur Mas’s Convergencia party and Esquerra Republicana.
  • CUP is an anti-capitalist party that also supports secession from Spain.
  • Partido Popular (PP) is the first party in Spain; the party had it’s worst local-election result in 24 years back in May amid a proliferation of new parties and political scandals.
  • Socialists are the second main party in the country, winning 25 percent of the vote in the municipal elections; in Catalonia they run as the PSC.
  • Podemos, the anti-austerity party, had a surge in popularity after it was formed but has been losing ground nationally to the more pro-European Citizens party; polls suggest Catalunya Si que es Pot, backed by Podemos, may win 14-17 seats.

So why all the fuss?

  • If pro-independence parties win a majority they could dominate the political agenda in Spain in the years ahead.
  • Even if they don’t, there will be a political mess with uncertainty about who will run the region, Antonio Barroso, analyst at Teneo Intelligence, says in interview. Ultimately what happens to the region will depend on what govt. emerges after the national election in December, he says.
  • The polls may also weigh on growth in the coming months, JPMorgan analysts say.
  • Morgan Stanley says there’s a possibility the implementation of growth-friendly Spanish reforms may slow after the vote.
  • Consensus view is that some kind of constitutional reform will take place which grants Catalonia greater autonomy.
  • Two likely consequences are increased uncertainty in short-term and a reduction in central government influence over the regions, SG economist Yvan Mamalet says.
  • The latter will ultimately undermine recent efforts to limit bureaucracy and harmonize markets across Spain, weighing on long-term potential growth.
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