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Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

The Spanish region of Catalonia plans to hold a referendum on becoming independent later this year, a plebiscite that the central government says is illegal. Bondholders are starting to take fright at the prospect of a constitutional battle. But they're probably jumping at shadows.

Catalonia owes bondholders about 5.6 billion euros, spread across 26 bond issues. The yield on the region's benchmark issue, 1 billion euros ($1.2 billion) of bonds that mature in 2020, has risen more than half a percentage point in recent weeks.

Catalonia's Borrowing Cost Jumps
Yield on the region's 4.95% bond repayable in 2020
Source: Bloomberg

Last week, Catalonia's regional assembly approved a fast-track procedure to pave the way for legislation to hold a referendum on Oct. 1. The Spanish government has introduced measures to prevent the renegade region from using taxpayer funds to pay for the vote. The extra yield investors require to hold Catalonia's debt over the equivalent Spanish government debt has increased to the most this year. 

Rising Risk
Yield spread between three-year Catalonia and Spanish government bond yields
Source: Bloomberg

At a non-binding vote three years ago, some 81 percent of Catalans backed independence, though the results were probably skewed by some voters protesting a government ruling that the ballot was illegal in the first place. Since then, however, Spain's unemployment rate has declined to an eight-year low of 17.2 percent, down from almost 24 percent.

Economic Improvement
Spanish unemployment has dropped to an eight-year low
Source: Bloomberg

In the run-up to that November 2014 plebiscite, polls consistently showed Catalans voting in favor of going it alone. Support for secession, though, has been fading in recent months, according to opinion polls.

Support for Independence Falters
Percentage of voters in polls who say they support independence for Catalonia
Source: Bloomberg News

The prospect of independence is worrying for holders of the region's debt because Catalonia, as the country's biggest economic region, would probably take responsibility for some of Spain's 1.2 trillion euros of public debt. Catalan Regional President Carles Puigdemont told Bloomberg News reporter Esteban Duarte last week that he's ready to go to prison to defend the region's right to pursue separatism.

But Europe's political landscape has become significantly less febrile in recent months. The election of Emmanuel Macron as President of France lessened concern about a tide of populism sweeping across Europe, while German Chancellor Angela Merkel looks set to retain power in her forthcoming vote.  

The most significant development for Catalonia, however, is probably in Scotland, where First Minister Nicola Sturgeon has put her calls for a second independence vote on ice after her Scottish National Party lost ground in the U.K. election earlier this year.

When even the poster child of separatism throws in the towel, maybe Catalonia's bondholders have nothing to fear except fear itself.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net