Don Quijones: Catalonia Threatens Spain with “Financial Bloodbath”

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By Don Quijones, Spain & Mexico, editor at Wolf Street. Originally published at Wolf Street

On Monday El Pais published leaked excerpts from what it claims to be the Catalonian regional government’s road map to independence. The secret document includes a plan for the region to unilaterally break away from Spain should its citizens be prevented from holding a referendum on independence in the fall.

It provoked a fierce backlash from Madrid. “This proposal is an unacceptable attempt to blackmail the state,” Spain’s Prime Minister Mariano Rajoy said in a hastily convened press conference. Spain’s defense minister María Dolores de Cospedal likened the plot to a coup d’état. In the meantime, Madrid continues to refuse to even entertain the idea of allowing a referendum on Catalan independence, despite the fact that in just about every survey of the last few years 80% of Catalans, including many unionists, have requested one.

It would mean the loss of 25-30% of Spain’s gross domestic product (GDP), says Spain’s Minister of the Economy, Luis de Guindos. And that’s something the government “will never let happen.”

But Catalonia knows it has a card up its sleeves: its tick-tocking debt bomb. Catalonia can no longer issue its own debt and depends on the central government’s national liquidity fund (FLA, for its Spanish acronym) for about 60% of its funds. As ratings agency Fitch warned in April last year when it sent Catalonian debt even deeper into junk territory, the region has grave liquidity problems that will require “proactive management” and “close collaboration with the central state ” — something that’s clearly not on the cards any time soon.

At the same time, Spain’s public debt continues to grow, recently bursting through 100% of GDP. Even with historically low interest rates (gracie, Signor Draghi), the price of servicing government debt can spiral out of control. Between 2011 and 2015 Spain’s central government spent €121 billion – the equivalent of 12% of annual GDP – on interest payments.

As Catalonia’s finance minister, Oriol Junqueras, recently noted, Rajoy’s government has already burnt through the €65 billion social security fund surplus it inherited in 2011 and is now using a toxic blend of tax funds and public debt to finance the country’s widening pension deficit, which is forecast to reach between €10 billion and €15 billion a year.

In other words, Spain’s deficit, already one of the largest in Europe, is going to remain high for the foreseeable future, despite all the threats of multi billion-euro fines emanating from Brussels. As the widely renowned Columbia University Professor of Economics (and fervent Catalan separatist) Xavier Sala i Marti recently pointed in an interview on Catalan television, all of the debt, including the debt owed by the Catalan regional government, is in the name of the King of Spain:

It’s (Spain’s) debt. They already have a debt load of 100% of GDP. If Catalonia declared independence tomorrow, and Spain were to say “you’re going to be kicked out of the EU for three generations” and everything else they threaten us with, we’d just say to them, “well, these little papers of debt (bonds), you can have them for the next three generations.” All of a sudden, they’d have a much smaller GDP and a much larger debt overhang (around 125%)… A debt-to-GDP ratio of 125% would not be feasible. Spain would not be able to pay the debt they owe the Spanish banks, the biggest holders of Spanish bonds. And that would ruin them, triggering a financial bloodbath.

Such an outcome has also been postulated by the U.S. rating agency Moody’s: in effect, any default on Catalonia’s debt would be interpreted by the markets as a Spanish default. In other words, whence goeth Catalonia, goeth Spain.

And right now, Catalonia’s government seems determined to stage the mother of all showdowns with the central government in Madrid: a financial fiasco for both sides. Catalans are a notoriously prudent, cautious people. As such, it’s fair to assume that at least some of what lies behind the regional government’s recent escalation of tensions with Madrid is bluff and bluster.

But a big bluff can sometime set one down a very dangerous path from which it can be difficult to extricate oneself. The Catalan government may be hoping that threatening to declare independence unilaterally, or even following through on the threats, will finally push the Spanish government into having to compromise. But it’s a massive gamble.

In some parts of Catalonia, including Barcelona (from where I’m writing this article), public support for independence appears to be on the wane. But for many nationalists in the Catalan government, turning back with so little of substance to show pro-independence voters after promising them so much may not be an option.

As for Rajoy’s government, its staunch defense of the country’s territorial unity is a vital vote winner for its core supporters. And right now, with new corruption scandals engulfing senior members of Rajoy’s People’s Party breaking every week or two, these are votes it can ill afford to lose, especially with new snap general elections growing increasingly likely.

In other words, the prospects of a win-win solution being found in the coming months are by now slim. The chances of a lose-lose outcome are growing by the day. Does this mean that Spain, the Eurozone’s fourth largest economy, is on the verge of breaking up? Probably not. But to prevent that from happening, Madrid may end up having to take drastic (and deeply symbolic) actions, including invoking article 155 of the constitution, which will effectively put an end to all forms of Catalan self governance. And that could merely serve to strengthen the resolve of Catalan separatists while further polarizing divisions within Spain’s richest region.

When locals can’t afford to live there anymore, they get restless. Read…  The Backlash to Spain’s New Property Boom Has Begun

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  1. Disturbed Voter

    Like the US in 1861 .. isn’t the ambitions of local politicians just as potentially deadly as the ambitions of national politicians?

  2. Jim Haygood

    Catalans are a notoriously prudent, cautious people.
    Ratings agency Fitch … last year sent Catalonian debt even deeper into junk territory.

    How do notoriously prudent, cautious people end up issuing a mountain of junk-rated debt? Maybe Catalans have got as unrealistic a cultural self-image as americanos, who think an enlightened Deity made them No. 1.

    When it comes to unfunded pension promises, a deadly combination of unfavorable demographics and less than candid government accounting means that debt will have to rise higher still to fund social promises scribbled in lipstick on a cocktail napkin.

    *smacks forehead with palm*

    What were we thinking?

    1. Ignacio

      It is an example on how cultural differences do not matter even if they are somehow real. Catalonia was one of the regions most affected by the housing bubble, despite many catalonians really tend to be prudent and cautious. This is the same kind of mistake we do when we think of germans as productive, saving, hard-working compared with lazy, unproductive spendthrift spanish. Other contitions rather that vague cultural differences are what matter.

      1. St Jacques

        The whole “Catalans are prudent and cautious” is just so much propaganda bs. Catalonia benefitted from being Spain’s port on the Mediterranean with links to the Italian peninsula and nearby France and from protectionism of its industries going way back. In Spain, it was the poor regions where people are “prudent and cautious”, because they have little choice but to save the little they got. Galicians have the miserly reputation in Spain that Scots do in the UK. Must be their common celtic heritage, oh wait, it was because life was hard in those countries and they had to be that way to survive. Traditionally, until the whole bloody stupid Euro housing bubble, Spaniards generally were good savers.

    2. Disturbed Voter

      Those who live by credit and fiat money, die by credit and fiat money. It isn’t as if W Europeans aren’t well educated as to what happened in Rome and Florence and Venice.

  3. Ignacio

    Stupidity is reaching unprecedented heigths in both, Madrid and Barcelona. The sign of these days. Who will champion in stupidity is something unpredictable.
    Written by somebody living in Madrid

    1. Chauncey Gardiner

      Perhaps the anger is somewhat misdirected and the list should be expanded to include some residents of Brussels and Frankfurt?

  4. ambrit

    If the Catalans could get the Provencals to do the same across the Pyraneese mountains, we would see a more regionalist Europe, and a more rational one. (Plus, smaller statelets would be easier for Brussels to , er, “manage.” Think of the EU as an old fashioned holding company.)

    1. Synoia

      “Think of the EU as an old fashioned holding company.”

      Really? That went well (ITT and others).

      1. ambrit

        Sorry to be late replying.
        ITT was an entity working under the legal oversight of the American Government. Anti trust laws were the mechanism used to break up some of the then extant power players. These entities were not broken up by actions of their constituent parts. No union action or shareholder proceeding effected the dissolution. The EU would be in the position of the governing authority in relation to the posited statelets. As seen today, sheer bureaucratic inertia and empire building would ensure continuation of the meta entity. So, imagine a holding company without national constraints, in essence, the vaunted neo-liberal global polity.

    2. St Jacques

      Being a smaller, more (cough) “rational” region worked out well for Greece in their negotiations with the EU….oh wait….
      btw Catalonia’s economy is deeply embedded with the rest of Spain. and acts as Spain’s Mediterranean gateway, and has done so for hundreds of years, except only more so now than ever before. (see my post above).

      1. ambrit

        Yes, even while rolling over and offering their throats in submission the Greeks have been well and truly buggered. The result as seen from this remove seems to have been the same as the threatened “chastisement” by the Teutons of an independent thinking Greece.
        How does an independent or semi so port of Barcelona differ in it’s relations with the rest of Spain then, say, Amsterdam or Antwerps relations with the German economic system it services? Will the interior of Espana build a mega port on the Basque coast? Elsewhere do the trick?

        1. St Jacques

          It’s huge economic importance, not only as a port, but as a major industrial and commercial area, which in no small part had been driven by past protectionism and big Spanish state investments at the expense of the country’s poorer regions, means that Spain cannot afford to let it go, and if it does go I expect there will be some sort of retaliation. And there are other options for Mediterranean ports.

          1. ambrit

            Ah. Sunk costs have a long afterlife. One aspect of interest is how much of the “investment” into Catalonia is local, and how much all Spain. Can the extraneous banks making investments also have influence, say, through their pressure on the central bank of Spain? I would guess that a semi independent Catalonia would have to hike taxes and impose tariffs to deal with the local debt. This would supposedly cut into investor profits, and when said investors aren’t locals, and don’t give a d— about local issues, conflicts will erupt.
            In reference to “Spain’s poorer regions,” you seem to posit a central government that has much more of a consideration for it’s “fly over” regions than does America.
            Having had a look at the Spanish Med Coastline, I see what you mean about other options. My question is, is the Spanish economy not strong enough to support multiple Med cargo ports? Or is the industry not located where it would benefit from competition to Catalan ports? An interesting problem. Wasn’t Catalonia one of the centres of anti-Franco sentiment during and after the Civil War there? That would also explain a lot.

            1. St Jacques

              Madrid also put up a heroic resistance as a Republican stronghold against Franco. Of course the Catalans did not appreciate Franco’s attempt to stamp out their language and historic identity with his weird idea of a homogenous bull fighting, flamenco dancing Spain, but that was not unique to the Catalans, that was also the Basques, Galicians, Asturians, etc, but all that was reversed with the current constitution which received overwhelming support from all regions in the 1978 referendum. Ironically Franco’s regime invested heavily in building up the heavy industry in Catalonia but only for practical reasons; it was already a major industrial region. Bear in mind that Spain’s manufactured exports dwarf its tourism earnings, and 40% of those are from Catalonia.

              It’s not so much the central government “cares” more about the poorer regions, it’s simply the politics of sharing the burden. The rich autonomous communities, especially the big economic engines Madrid and Catalonia, and to a lesser extent the Basque country, Navarre, and Aragon, subsidise the poorer regions. This is what is really behind the whole independence push, a wish to free up some cash for themselves, but it’s all dressed up in phoney historical/cultural grievances by cynical politicians. Mind you, with so many in the dock, the corrupt Catalan ruling class has no more moral authority than their popularly despised opponents in the central government. I hope this ramble has helped.

  5. a different chris

    >“This proposal is an unacceptable attempt to blackmail the state,”

    Acceptable blackmail is of course something done by corporations and their bankster buddies.

  6. David Barrera

    Centralization and periphery, within a circular economic and politically constructed legal rational, this sums up and beautifully condenses the Spanish government tensions, contradictions and its range of action. (By the way, those familiar with the interplay of forces and power relationships over the years between the Bascs and the central government, with their alliances and the past role played by violence, can easily understand the centralization-periphery theme). To the “Catalan case” the Spanish government circular absolutistic legalism amounts to precisely this: a conservative legal wording and document whose only interpretation (and therefore only prescription) is that one, virtually and de facto, cannot democratically change what had once before been democratically established. Put it differently, there is a politically, historically constructed stiff, muscular dogmatic legal surplus and a democratic deficit in Spain. Hence, the democratically voted “estatut” became effectively quashed by the Spanish courts. Therefore, the intellectually groundless formalistic discourse by Arrimadas from Ciutadans (PP’s chic version) after September’s 11th protests, protests which are among the largest on record in Europe: “what if one protested about paying a traffic ticket? One must abide by the law!”. In order to dismiss Arrimada’s logic suffices to bring to light our past U.S.A civil movement, with the legitimate and well invested energy unleashed by thousands of disenfranchised U.S citizens and all the consequent changes they brought about.
    On the Spanish circular economics the pension system is paradigmatic. The PP ruling party guarantees the payment of pensions. Voters’ fears assuagement feeds in turn the ruling party with votes. Yet, economic policy absurdity is blatant: the government issues debt to meet another debt, the pensions’ debt. Circularity excludes other paths from economic discourse. Must an item self-finance itself or be satisfied by issuing debt? Can a global UBI program,EU circumscribed,complement pensions’ liabilities? Could the validity of other alternatives, i.e global MMT application, be seriously considered and studied?…More tensions and contradictions…Mr. Rajoy or how to be a puppet of European austerity and at the same time snowball the pension problem to keep himself in power… The Spanish and European bombs are ticking

    1. reslez

      Spain can’t afford pensions for its elderly but somehow can afford 40% youth and 20% general unemployment. This is the stupidity of Maastricht and the Euro currency board. Catalan has the right idea, it’s a shame so many must suffer because of this blindness. But since the rich prosper from the current system no politician will change it.

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