Radicals Gaining Ground in Catalonia Send Warning to Bond Market

  • Spanish region's debt yields four times those of sovereign
  • Anti-capitalists ask president to show disobedience to Spain

It’s all getting a bit more complicated in Catalonia.

QuickTake Catalonia

After failing to win a majority in the region’s assembly with a mainstream separatist alliance on Sept. 27, acting President Artur Mas is trying to keep his position as leader of the drive for independence from Spain by bringing the more radical CUP into the process. The party is demanding Mas pursues “non-reversible acts of disobedience” toward Spain before starting talks on whether to support him remaining president.

At stake is the future of a region that makes up a fifth of Spain’s economy and Mas’s post-electoral strategy is doing nothing to assuage concerns. In the run-up to last month’s vote, Catalan bonds maturing in February 2020 dropped, with the yield jumping to a level four times that of Spanish debt of a similar maturity. Tension between Madrid and Barcelona was among the reasons cited by Standard & Poor’s to cut Catalonia’s debt rating on Oct. 9 to BB-, three steps below investment grade.

“The business community is worried, no matter what their political ideas are, and foreign investors are extremely worried,” Jaime Malet, chairman of the American Chamber of Commerce in Spain, said in a telephone interview from Barcelona. “While nobody sees independence happening in the short or medium term, people are seeing a lack of governance and a lot of populism.”

Spread Widens

Catalonia’s 1 billion euros ($1.1 billion) of 4.95 percent bonds yielded 2.98 percent last week, or 2.33 percentage points above Spanish debt. The spread rose to as high as 2.53 percentage points on Aug. 4, the day after Mas called the election and said it was a de facto referendum on independence.

Mas’s mainstream separatist platform won 62 seats, short of the 68 seats needed to reach majority. CUP, which wants to tear up Spanish laws allowing banks to foreclose on mortgages and pull an independent Catalonia out of the euro, got 10 seats.

“While the election results were positive from bondholders’ perspective as separatists can’t go ahead with their agenda, there are still clouds ahead,” said Francesco Marani, a fixed-income trader at Auriga Global Investors SA in Madrid. “The main concern is that Mas is finding different ways to keep the debate going.”

Rajoy’s Refusal

Spanish Prime Minister Mariano Rajoy refuses to discuss an independence referendum because he says it’s beyond the power given by the country’s constitution. Instead, the central government is setting up a legal firewall through the court.

Rajoy is considering activating a constitutional clause to suspend the autonomy of the Catalan government, El Mundo reported on Saturday citing unidentified people familiar with the matter. Spanish prime ministers can use such a measure after getting authorization from the Senate, where Rajoy’s People’s Party has outright majority.

Catalonia relies on the central government to finance services including education and health, collecting taxes nationwide before distributing money from the budget, and Spain is the region’s biggest creditor. 

Loans from Spain account for 60 percent of Catalonia’s debt because of rescue funds set up during the financial crisis when parts of southern Europe were locked out of bond markets, Economy Minister Luis de Guindos said on Thursday.

The CUP’s road map toward secession runs contrary to Mas’s. The party believes the first step toward a separate state is to start disobeying Spanish laws, while Mas advocates a declaration of an independence at the end of an 18-month process.

“Though we continue ruling out a declaration of independence, we think the Catalan issue will bring uncertainty, so tension in the markets,” said Jesus Castillo, a Paris-based economist at Natixis, said by e-mail. “In our opinion, the most important political risk is in Catalonia.”

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