The Catalonian secession crisis is roiling Spain, but the nation's debt markets are gliding along serenely.
Prime Minister Mariano Rajoy has triggered Article 155 of the constitution to take direct control of Catalonia, removing the regional government. The Senate, where the ruling Popular Party has a majority, will debate the measures on Thursday, and these may come into force on Saturday. The Catalan independence movement could well declare secession before then.
Investors have admirably avoided panic, partly on expectations a compromise deal would emerge. Bond yields have certainly seen worse in recent months and years.
And the stock selloff seems to have eased.
To be fair, Spain's fixed-income market has substantial technical support. Helping in the short-term are 24 billion euros ($28.2 billion) of government bonds maturing at the end of October, the bulk of which will be reinvested. And the European Central Bank's bond purchases programs have kept spreads over Germany from spiraling wider.
But these steadying influences will not be around forever. The ECB on Thursday will probably decide to cut the current 60 billion-euro pace of monthly purchases in half, starting in January.
And the crisis will bite economically -- already the government is cutting estimates for GDP growth.
While Madrid focuses the bulk of its efforts on keeping Catalonia from splitting, its 2018 budget bill is stuck. Rajoy does not have a majority in the lower house, and had been relying on Basque support to pass it. However the leader of the Basques, Inigo Urkullu, made clear in a tweet on Saturday that his party supports the Catalans. That doesn't bode well for Rajoy.
This probably kills the prospect of progress on the budget, or a raft of other legislative business, in the near future. If this impasse persists, national elections could soon follow. The next plebiscite isn't scheduled until 2020, but if Rajoy sensed an opportunity to secure a majority, he could call another poll. This could even be combined with Catalan regional elections, which according to Article 155 must be held within six months. While the politics are complicated, as are the risks, a new vote can't be ruled out.
Rajoy has skilfully built a majority consensus with two of the main opposition parties, the Socialists and Ciudadanos, on the government's handling of the Catalan crisis. But this union is a fragile one. Already a Socialist member of parliament from Catalonia resigned to protest his party's allegiance with Rajoy.
It may be further tested if the practicalities of taking central government control of Catalonia, including the Mossos d'Esquadra armed police force, prove to be anything other than totally peaceful. The 450,000 turnout for the protest in Barcelona this weekend shows the Catalan independence movement is not likely to back down.
Far from taking steps toward an agreement, neither side shows signs of backing down now. This would be political suicide. Enforcing Article 155 will be a whole new chapter for Spanish markets, and bond yields are vulnerable.
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