Spain: Po­lit­i­cal noise rises as Cat­alo­nia vote nears

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Cat­alo­nia’s con­tin­ued push for in­de­pen­dence is in­creas­ing po­lit­i­cal un­cer­tainty in the re­gion and rais­ing po­lit­i­cal noise in the King­dom of Spain gen­er­ally, ac­cord­ing to DBRS.

The noise is hav­ing an im­pact, as yields on Cat­alo­nia’s debt have widened rel­a­tive to Span­ish sov­er­eign debt, the rat­ing agency said.

DBRS ex­pects the noise level to in­crease in the weeks lead­ing up to the ref­er­en­dum, which the re­gional gov­ern­ment of Cat­alo­nia plans to hold on Oc­to­ber 1 (com­monly re­ferred to as “1-O”).

Un­der DBRS’s most likely sce­nario, which is cur­rently fac­tored into the King­dom of Spain’s rat­ing (A (low), Sta­ble), Spain is ex­pected to pre­serve its unity over the medi­umterm. This view largely re­flects the op­po­si­tion of the na­tional gov­ern­ment to Cat­alo­nia’s in­de­pen­dence and the cur­rent le­gal and in­sti­tu­tional hur­dles that would i mpede the re­gional gov­ern­ment’s se­ces­sion plans.

Be­sides th­ese im­ped­i­ments, DBRS con­sid­ers that strong eco­nomic growth and the rapid re­duc­tion in un­em­ploy­ment both in Spain and in Cat­alo­nia are likely to re­duce sup­port for in­de­pen­dence. In ad­di­tion, in DBRS’s view, the new Span­ish re­gional fi­nanc­ing sys­tem un­der dis­cus­sion could al­le­vi­ate some of the po­lit­i­cal sup­port for in­de­pen­dence in Cat­alo­nia go­ing for­ward.

The push for in­de­pen­dence is long stand­ing within Cat­alo­nia, but has been re-in­vig­o­rated in re­cent years. With a pop­u­la­tion of 7.5 mil­lion at the end of 2016, Cat­alo­nia is the sec­ond-most pop­u­lated re­gion in Spain af­ter An­dalu­sia. The re­gion also has the largest re­gional GDP in the coun­try at EUR 212 bil­lion (19% of na­tional out­put), ahead of Madrid.

Re­cent polls sug­gest, how­ever, that sup­port for in­de­pen­dence might have slightly waned over the last 12 months. Data from the re­gional Cen­tre for Opin­ion Stud­ies (CEO) at the end of June 2017 in­di­cate that 41.3% of Cata­lans were in favour of an in­de­pen­dent State (49.4% against), markedly below the 47.7% in favour recorded in June 2016 (42.4% against).

While any vote, if it oc­curs on 1-O, would likely see proin­de­pen­dence vot­ers gain ma­jor­ity, given the likely level of ab­sten­tions, DBRS con­sid­ers that the trend in pub­lic opin­ion may be slowly shift­ing in favour of re­tain­ing the King­dom of Spain’s unity.

Even if the vote were to take place on Oc­to­ber 1, DBRS does not an­tic­i­pate a uni­lat­eral se­ces­sion dec­la­ra­tion to fol­low. Such a dec­la­ra­tion would be il­le­gal and un­con­sti­tu­tional, given the le­gal and in­sti­tu­tional safe­guards in place.

Th­ese in­clude (1) Span­ish con­sti­tu­tional pro­tec­tion; (2) the na­tional gov­ern­ment fi­nanc­ing of Cat­alo­nia and the as­so­ci­ated fi­nan­cial over­sight; and (3) the ques­tion of in­ter­na­tional recog­ni­tion for Cat­alo­nia by the United Na­tions (UN), NATO and the Euro­pean Union (EU, rated AAA, Sta­ble by DBRS).

Spain’s Con­sti­tu­tional Court,

sup­ports

the

cur­rent Span­ish gov­ern­ment po­si­tion. The court has ruled in the past that Au­tonomous Com­mu­ni­ties can­not uni­lat­er­ally call for a self-de­ter­mi­na­tion ref­er­en­dum un­der the Span­ish Con­sti­tu­tion.

Even if ul­ti­mately the Span­ish gov­ern­ment opened the door to a ref­er­en­dum, which DBRS con­sid­ers very un­likely, chang­ing the Span­ish Con­sti­tu­tion to al­low the sep­a­ra­tion of Cat­alo­nia would likely prove to be a very de­mand­ing and lengthy process. A special ma­jor­ity of the Span­ish Par­lia­ment is re­quired to change the Span­ish Con­sti­tu­tion to al­low the le­gal pos­si­bil­ity of such an oc­cur­rence. DBRS cur­rently views this as highly un­likely given the ab­sence of sup­port for in­de­pen­dence by most of Spain’s pop­u­la­tion.

In a sce­nario where the vote on 1-O does not oc­cur, DBRS ex­pects calls for the in­de­pen­dence of Cat­alo­nia to con­tinue.

Cat­alo­nia’s re­gional fi­nances are al­ready un­der added scru­tiny. On July 21, the na­tional Ex­ec­u­tive Com­mit­tee of the Gov­ern­ment for Eco­nomic Is­sues (Comisión Del­e­gada del Go­bierno para Asun­tos Económi­cos) de­cided that ad­di­tional scru­tiny on the re­gional fi­nances needed to be im­ple­mented to en­sure that no pub­lic money was used by Cat­alo­nia to fi­nance the or­gan­i­sa­tion of the ref­er­en­dum on 1O. As a re­sult, the re­gion has to sub­mit weekly fi­nan­cial state­ments con­firm­ing no ref­er­en­dum-re­lated pub­lic ex­pen­di­tures.

Fail­ing to com­ply with th­ese re­quire­ments could lead the na­tional gov­ern­ment to stop sup­port­ing the re­gion fi­nan­cially through its Fondo de Liq­uidez Au­tonómico (FLA), thereby jeop­ar­dis­ing the re­gion’s abil­ity to meet its debt obli­ga­tions. Cat­alo­nia has re­mained largely de­pen­dent on the cen­tral gov­ern­ment’s cheap fi­nanc­ing since 2012. At the end of March 2017, the fi­nan­cial sup­port pro­vided by the na­tional gov­ern­ment to Cat­alo­nia rep­re­sented EUR 50.6 bil­lion, or two-thirds of the re­gional debt stock (EUR 75.4 bil­lion).

Re­cently, yields on Cat­alo­nia’s debt have in­creased in the whole­sale mar­ket, even as the King­dom of Spain’s yields have de­clined. DBRS ex­pects that the re­gion will con­tinue to ben­e­fit from FLA fi­nanc­ing, but pres­sures on re­gional yields might widen fur­ther rel­a­tive to the sov­er­eign go­ing for­ward, as the po­lit­i­cal noise ahead of the ref­er­en­dum in­creases. This could con­tinue af­ter the ref­er­en­dum if the sit­u­a­tion does not nor­malise. DBRS points out that the re­gion will face large re­fi­nanc­ing needs and bond re­demp­tions in 2018, with to­tal re­fi­nanc­ing needs of around EUR 8 bil­lion, of which EUR 1.7 bil­lion cor­re­sponds to three bond ma­tu­ri­ties that DBRS ex­pects to be largely met by FLA fi­nanc­ing.

DBRS an­tic­i­pates that in­ter­na­tional recog­ni­tion of Cat­alo­nia as a sep­a­rate and in­de­pen­dent State by the UN, NATO and the EU would be lim­ited. Un­der cur­rent cir­cum­stances, a Cata­lan uni­lat­eral dec­la­ra­tion of in­de­pen­dence fol­low­ing an un­con­sti­tu­tional ref­er­en­dum would raise the ques­tion of in­ter­na­tional recog­ni­tion. On the ba­sis of Spain’s right to main­tain its ter­ri­to­rial in­tegrity, recog­ni­tion by the United Na­tions of an in­de­pen­dent Cat­alo­nia and sub­se­quent recog­ni­tion by other coun­tries and in­sti­tu­tions, such as the EU, cur­rently seems highly un­likely.

In the past, of­fi­cials from the Euro­pean Com­mis­sion men­tioned that a new, in­de­pen­dent State, would be­come a third coun­try with re­gard to the EU and would need to rene­go­ti­ate its ac­ces­sion to the in­sti­tu­tion to be­come a mem­ber. DBRS points out that un­der ar­ti­cle 49 of the Lis­bon Treaty, new EU mem­ber­ship re­quires ap­proval from all ex­ist­ing mem­bers, in­clud­ing Spain. Given the cur­rent po­si­tion of the Span­ish gov­ern­ment, and the il­le­gal and un­con­sti­tu­tional char­ac­ter of the 1-O ref­er­en­dum, such ap­proval ap­pears highly un­likely.

In ad­di­tion, NATO’s rep­re­sen­ta­tives also men­tioned re­fer­ring to a planned Scot­tish ref­er­en­dum fol­low­ing the Brexit vote that join­ing the al­liance would ne­ces­si­tate Scot­land to legally split from the United King­dom (rated AAA, Sta­ble by DBRS), and be ac­cepted by all NATO mem­bers as a new in­de­pen­dent State. The fact that Cat­alo­nia’s planned ref­er­en­dum is un­recog­nised by the Span­ish cen­tral gov­ern­ment and Spain is a mem­ber of NATO, would pre­vent, in DBRS’s view, NATO’s recog­ni­tion of Cat­alo­nia.

While the po­lit­i­cal sit­u­a­tion is fluid with con­tin­u­ous un­cer­tainty at least un­til the next re­gional Par­lia­men­tary elec­tions in Novem­ber 2019, DBRS’s base­line sce­nario is that of con­ti­nu­ity for the King­dom of Spain.

DBRS also be­lieves that the Cat­alo­nian pop­u­la­tion’s push for in­de­pen­dence might fur­ther ease over the short to medium term, re­flect­ing:

• The con­tin­ued strong eco­nomic growth un­em­ploy­ment re­duc­tion in Spain and Cat­alo­nia;

• The progress in the dis­cus­sions con­cern­ing a re­vi­sion of the re­gional fi­nanc­ing sys­tem, which could be more ben­e­fi­cial for Span­ish re­gions and Cat­alo­nia;

• The in­vest­ments of EUR 4.2 bil­lion in Cat­alo­nia an­nounced in March 2017 by the Span­ish Prime Min­is­ter, par­tic­u­larly for trans­port in­fra­struc­ture for the 2017-20 pe­riod;

• What ap­pears as a more open stance on ac­knowl­edg­ing re­gional dif­fer­ences at the na­tional gov­ern­ment level.

and

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