The closer the referendum, the more draconian Spain’s response.
After years of simmering tensions, the biggest showdown yet between Barcelona and Madrid appears to be just weeks away. On Oct 1, the regional government of Catalonia plans to hold a referendum on national independence, in complete defiance of Spain’s central government in Madrid. As a last show of strength, an estimated one million separatists filled the streets of Barcelona, a city of just one and a half million people, for Catalonia’s national holiday, La Diada, on Monday.
Companies and investors are somewhat less enthused by the prospect of a head-on clash between Madrid and Catalonia, Spain’s richest and fastest-growing regional economy. An increasing number of financial firms, analysts and rating agencies are finally warning that what began as a largely political (and perfectly avoidable) crisis has the potential to spiral into a financial maelstrom that could spread far beyond the borders of both Catalonia and Spain.
Catalonia accounts for almost one-fifth of the nation’s economic output, but for years it’s been locked out from the capital markets and unable to issue its own debt, which is in deep junk territory. As such, it depends on the central government’s national liquidity fund (FLA) for about 60% of its funding, while the central government depends on Catalonia’s tax revenues to keep meeting its financial obligations.
This mutually dependent relationship has been under heavy strain ever since 2010, when Spain’s highly politicized Supreme Court, at the urging of the People’s Party, then in opposition but now in govermnent, decided to annul many of the articles of the new Statute of Autonomy signed in 2006 between Spain’s previous Zapatero government and Catalonia’s regional government, effectively stripping the agreement of any meaning.
This post was published at Wolf Street on Sep 12, 2017.