Catalonia and markets: what the experts think
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.”
“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.
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