Cat­alo­nia and mar­kets: what the ex­perts think

The Week - - Talking Points City -

Cata­lan cliff-edge

News that Cat­alo­nia’s pres­i­dent, Car­les Puigde­mont, has put the re­gion’s in­de­pen­dence dec­la­ra­tion on hold came as a wel­come re­lief to mar­kets. As the ex­o­dus of com­pa­nies from Cat­alo­nia gath­ered pace last week, in­vestors were brac­ing them­selves for more “tur­moil”, said The Sun­day Times. “Trad­ing in Span­ish govern­ment bonds surged to dou­ble its nor­mal vol­ume”, as rat­ings agen­cies warned that es­ca­la­tion of the cri­sis would hit Spain’s credit rat­ing. Mean­while, “amid mount­ing cor­po­rate panic”, the Span­ish govern­ment passed an emer­gency de­cree “al­low­ing com­pa­nies to move their HQ with­out an emer­gency vote”. The big con­cern of Cata­lan-based banks like Caix­a­bank and Sabadell, which owns Bri­tain’s TSB, was that Span­ish cus­tomers would pull their de­posits. “The cost of in­sur­ing Caix­a­bank against de­fault over a five-year pe­riod jumped by nearly 28% over the past three weeks.”

Debt ques­tions

“An in­de­pen­dent Cat­alo­nia” might not be “on the cards right now”, but there’s no ques­tion that it “would be a vi­able stand­alone en­tity”, said John Ste­pek on Money­week.com. Still, there are huge “prac­ti­cal prob­lems”: the ques­tion of how you split debts, for a start. Last week’s “drama” showed “just how hard it is for a sep­a­ratist re­gion to safe­guard its fi­nan­cial sys­tem when debts in hard cur­rency – in this case eu­ros – are be­yond its con­trol” and there is no “lender-of-last-re­sort”, said Am­brose Evans-pritchard in The Daily Tele­graph. No won­der com­pa­nies an­nounc­ing re­lo­ca­tions saw “an in­stant surge” in their share price.

What next?

The re­lief rally greet­ing Puigde­mont’s climb­down saw Spain’s bat­tered Ibex 35 in­dex gain 1.5%, with banks lead­ing the ad­vance, said the FT. “Nonethe­less, there is a cau­tious feel to trade” in Europe. “The stand-off be­tween Madrid and the sep­a­ratists serves as a re­minder of the risks faced by the mar­ket, af­ter a bull run has left val­u­a­tions look­ing high.” Un­til now, “the chaos in Cat­alo­nia had been largely dis­missed by global in­vestors as a re­gional is­sue”, said Nigel Green of the de­vere Group. But with the prospect of in­de­pen­dence really in play, a “height­ened game of cat and mouse be­tween Barcelona and Madrid has been started”.

From street rally to re­lief rally

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