What does the mess in Catalonia mean for markets?

Catalonia independence protest © Getty Images
There’s a significant amount of support in Catalonia for independence from Spain

Catalonia has just held a referendum on declaring independence from Spain.

Spain didn’t want it to, so it sent in the police.

Predictably, that was a PR coup for the Catalan government.

Now the Catalans are saying they have a mandate for independence, whether Spain accepts it or not.

So what happens now, and what’s the likely impact on markets?

Catalonia’s independence referendum

Just to be very clear, I have no view on Catalan independence itself. I don’t view it as being especially relevant to Brexit or to Scottish independence, and I have no ties to the region that might bias me one way or the other.

I also have no specialist knowledge on the subject. One thing I’ve realised over time is that few things are as complicated as another nation’s politics. Outsiders tend to look in and think that solving these things would all be ever so easy, if “x” would just do “y” and “a” would just do “b” and everyone would pull themselves together.

But if it was easy, it wouldn’t be a problem, because someone would have solved it. Easy problems get solved. Hard problems persist – because they’re hard.

So if you come across a problem, and the solution looks easy, have a good think before you confidently proclaim your wisdom to all and sundry. Because you probably haven’t thought it through.

More importantly, if you hear a talking head on financial news TV who’s been dragged in to give their view, you should almost certainly discount it.

So bearing all that in mind, let’s have a quick explainer on Catalonia, followed by a couple of observations.

Catalonia is wealthy region of northeast Spain. It accounts for about a fifth of Spanish GDP. It has a population of roughly 7.5 million – about 16% of the Spanish population. The capital is Barcelona. It already has a significant amount of autonomy, and has a long history as a region with a specific identity of its own.

Keeping it simple, there’s a significant amount of support for full independence from Spain. But unlike in Britain, the Spanish government is unwilling to sanction a referendum. In effect, as far as Spain is concerned, Catalonian independence isn’t an option.

So the Catalan government – currently run by the independence party – decided to hold a referendum anyway. Yesterday, the vote went ahead. Spain sent the police in. There were some nasty scenes. And now the Catalan government says  that the results – which were overwhelmingly pro-independence – mean the region’s voters have “earned the right to have an independent state”.

What happens next?

What can we say about this?

First, it really is hard to say that this is a democratically valid vote for independence. Yes, 90% of the 42.3% who voted, voted for independence. But if you were a “no” voter, and the government you recognise as being in charge – the Spanish government – said the referendum was illegal, then why would you vote? Especially if you had to get through lines of police to do so? So it’s not definitive by any means.

Second, at the same time, if you’re not allowed to hold a referendum, then it’s hard to see how you’re meant to get a clear picture of what voters want, given that a significant number of them have a clear desire for independence.

Third, whatever your views on the legalities and the responsibilities of the nation state, the Spanish government mishandled this. Nothing helps a nationalist make their case better than a dose of oppressive-looking behaviour. I suspect that the level of violence is being over-played somewhat (there were three arrests in total, the 800-odd reported casualties included people suffering anxiety attacks, and the vast majority of polling stations remained open). But that’s not the point.

So this is a tricky business. Catalonia has held an unquestionably illegal referendum of very dubious validity. But the attitude and reaction of the Spanish government has left the separatists feeling able to take the moral high ground and argue for a unilateral declaration of independence.

So what happens next?

Markets are clearly not particularly fazed about the vote this morning. The euro is a bit weaker against the dollar, but it’s not crashing. Credit spreads (the gap between yields on German bonds and those on other, riskier eurozone debt) have widened a little, however.

Thinking about the potential scenarios, that’s probably the right reaction for now. This will take a while to unravel, but it’s mainly a Spain-specific issue. It doesn’t yet herald the end of the eurozone, and while everyone with a bone to pick is trying to score their own political points off the back of the story, it really does have nothing to do with Brexit or populism or Italy’s upcoming elections – this is a long-running issue.

The most sensible outcome (and yes, that’s me, an outsider, giving unsolicited advice on a complicated topic) is that the Spanish government says that Catalonia can hold an official referendum, and then it campaigns for Catalonia to stay. Then, whatever the result, everyone just accepts it and gets on with it.

The worst outcome is that Spain just hopes it’ll go away, and it turns violent. That would be horrible and pointless, but in terms of markets, it’d be like every other low-level running political sore around the world – relatively low impact.

The main wobble market-wise would probably come if Catalonia and Spain decided to part ways. There are a host of practical issues to work out – what currency would Catalonia use; how much Spanish debt would it take on; what would the border arrangements be; how would the EU treat it (the EU has said in the past that it would treat Catalonia as a separate country immediately, so that’s a big potential headache); etc.

If Spain was going to lose a fifth of its economy and one of its most productive regions, anyone lending money to Spain would rightly be concerned. And if Catalonia is taking on its fair share of the debt, but with no specific plans on the currency it’ll be repaid in, that would also rattle lenders.

But those discussions are a fair distance into the future, if they happen at all.

In short, this is one to keep a close eye on. But on a day-to-day basis, it’s not something to change your portfolio over.

  • You say 90% of 42.3% isn’t decisive. But that’s still 38.1% of the electorate.

    Compare that with 37.5% who voted for Brexit and it sounds no less legitimate than our very own referendum in 2016.

  • “And if Catalonia is taking on its fair share of the debt, but with no specific plans on the currency it’ll be repaid in, that would also rattle lenders.”

    Surely the fair share will be repaid in the currency in which it was issued – Euros I would imagine for all of it. How Catalonia raises those Euros is its own problem. Either it will buy them from its own currency, which may or may not be expensive, or it will use Euros in its economy anyway, like Montenegro.

  • DemiSapien

    This is a global trend: Catalonians’s feel they pay much greater share of taxes than rest of Spain rather than allow the central government to redistribute with their hands in the pot. This is about broke governments desperate to hold power and they will turn against their people at any moment. The end of communism came fast and was marked by the fact that the police (army) refused to turn on the people, that was the end game. The Catalonian police here stood down, but the Spanish ones did not this time, but may will next time. I do take the view that government should be smaller and stop meddling. Rights should be negative rather than positive. Governments across the West have turned rights into claims of violation to retain the vote and power. These types of movement against governments will continue, until governments are seen for what they really are.

  • Andrew Crow

    The establishment/government that thinks it can override the will of the people by force is heading for trouble. The ‘police’ behaved in Catalunya like government stormtroopers. I thought Europe had evolved beyond this; it was reminiscent of the era of the Blackshirts. Violence was gratuitous and excessive.
    Sensibly the Madrid government could have allowed the referendum to go ahead and stuck to its legal argument that the referendum had no binding status and was in effect an opinion poll.

    It demonstrates a great lack of faith in the EU supranational function. In that sense it is allied to the Brexit situation. The European project is not working as well as it could. Too much intrusive micromanagement and not enough macro philosophy in my opinion.

    As you say the referendum result is tainted by a very low turnout which is hardly surprising. A confident government would have ensured that the remain vote turned out in force to support its position.

    Your conclusion as to market response seems to be about right. Markets are in complacent mode presently and responses to geopolitics have been consistently muted.

    Interesting times? Dangerous I think.

  • Horiboyable .

    Now that investors have seen how authoritatively Rahoy deals with folks that wish to vote should send shivers down the spine of any international investor. Rahoy is only acting in the interests of the state, so if you hold Spanish sovereign bonds, expect to be treated the same way when push come shove.

    Run for the hills.