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After looking like it was suing for peace with Spain, Catalonia’s government, buoyed by a pro-secession protest called “the stoppage of the country,” resumed its defiant stance.
In an interview with BBC, President of the Generalitat of Catalonia, Carles Puigdemont, said that Catalonia would declare independence within days. This bold pronunciation took place shortly before the King of Spain denounced the separatist leaders. A key section of his remarks, as translated by the Financial Times:
For some time, certain authorities in Catalonia, repeatedly, consciously and deliberately, have been failing to comply with the constitution and the statute on autonomy, which is the law that recognises and protects its historic institutions and its self-government.
“With these decisions they have systematically infringed the approved legal framework, showing an unacceptable disloyalty to the powers of the state. A state that those authorities represent in Catalonia.
“They have broken the democratic principles of the rule of law and have undermined the harmony and coexistence of Catalan society, to the point — unhappily — of dividing it. Today Catalan society is fractured and conflicted. Those authorities have ignored the feelings and sentiments of solidarity that have united and will unite all Spanish; and with their irresponsible conduct are even putting at risk the economic and social stability of Catalonia and all of Spain.
Catalonia’s separatists don’t appear to have a realistic end-game, particularly in the time frame they have set up. Punching the Catalans is seen as sport in much of the rest of the country, so even if Rajoy made less than optimal use of the political opportunity presented by cracking down on the referendum in an unnecessarily brutal manner, it’s not clear that he has come out a net loser. Reader St. Jacques argued that it had weakened Rajoy’s party, the Popular Party, to the benefit of PSOE, but the King’s denunciation may have limited the damage. If nothing else, the conflict over Catalonia’s future has diverted attention from a corruption scandal.
If Catalonia delivers, or looks like it is going to deliver on its threat, one course of action by Madrid may be to arrest or otherwise isolate the separatist leaders. As Jesus Martinez pointed out in comments yesterday:
The king’s speech sounds to me like (expectable) hard-line (the Sacred Unity of Spain) but with limits: he distinguishes between Catalan leadership and Catalan institutions. To me that sounds like they are going to arrest the Catalan government, possibly pro-independence MPs, stop the Catalan Parliament activities and give it months (6? A year?) for things to calm down and then hold elections. Making the pro-independence parties illegal would be an option.
Anonimo 2 made similar observations:
Now about the referendum itself: the strategy has been disastrous and at least in my opinion the outcome will be that independence or federalism will be further than ever as a result. That’s because this referendum has polarized the Spanish society and has strengthened the ruling Popular Party, the centralist wing of the Socialist party and the pseudo-liberals economic nazis of Ciudadanos. Podemos was the only big party willing to dialogate and listen to the Generalitat… A victory of Podemos would have been the only real way to change the things, yet ironically the identitary disputes have made sure that this won’t happen.
Catalans have not played the long-term game, they (we) have put ourselves between a rock and a hard place, and we have lost leverage and we have given wings to the worst of part of Spain. The defeat will be really painful… but mind you, we are used to lose and we do love lost causes (just check our history).
Some readers, particularly Jesus, were nevertheless enthusiastic about the ability of Catalonia to go its own way. I hate to be a nay-sayer, but the central government has the upper hand via its ability to shut down the banking system, if not in full, to a very substantial degree.
As reader RabidGhandi had caught, the Spanish government has already put itself in the position of using its power over the banking system to control the payments now being made by Catalonia’s government. As I read this article (and I welcome corrections and additions, since trying to understanding legal/regulatory interventions via an article translated by Google is a fraught business), Spain has used the secession threat to take control of Catalonia’s spending, taking the view that the violation of the Constitution gives it unlimited authority to intervene. From the rough English version of the El Mundo story:
The government begins to hit and where it hurts most. The Generalitat will not have free from its budget. Cristóbal Montoro has confiscated the keys of the box. From next week all the expenses destined to cover the essential public services of Catalonia will have to have the approval of Finance that will be who directly pay them. It is a question of preventing the money from being diverted to the referendum of 1-O .
This decision of exhaustive control of the Catalan accounts affects the salaries of the civil servants, the cost of the health, the education, the civil protection, the dependency and the diverse transfers in aid and subsidies to the families. In total, the approximately 1.4 billion euros per month of community funding is left to the central government, which is prepared to ensure that not a single public euro is diverted to pay for the 1-O referendum and the secessionist process…
What the Government decided this Friday is practically the application of Article 155 of the Constitution for economic purposes. It is true that the Government does not seize political competition from the Generalitat but, in fact, it binds its hands to decide on what it spends the money, since who will open the portfolio and make the appropriate payments, after strict justification by the Intervention General of the Generalitat , will be the Ministry of Finance.
And notice the mechanism for seizing control:
The central government will supervise even the approximately 250 million euros per month of own collection in Catalonia – a relatively small item, in the words of the minister – since when the Government orders financial institutions to make payments from these funds, thereof.
In this sense, Hacienda will send to the banks the text of the agreements adopted so that they are vigilant and do not allow any payment that is not justified by a certificate of the Catalan Intervention. If they detect that any of the operations may be related to the celebration of the independence consultation, they must immediately notify the Attorney General’s Office. It is a very similar method to that used to avoid criminal operations of money laundering.
In other words, Spain has mechanisms already in place by which it can require banks to step in and seize control of collections and expenditures made by parties engaging in criminal activity….and Spain’s courts have deemed the secession to be illegal. Reader Sue confirmed our reading of Spain’s ability to strangle Catalonia’s finances:
Banks cannot issue payments to Catalan public servants and Catalan institutions which depend on the Catalan Government, “Generalitat”, without previous paperwork submission and rubber stamp approval from the Spanish State bureaucracy. This has caused some anger among some Catalan public sector enterprises and contractors doing work for them when quick timely payments are of the essence. Nevertheless, right now public servants and organizations directly or indirectly linked to the Generalitat are being paid because Catalonia as of today is not a State and, (although micromanaged and surveilled and controlled by “Spain’s Ministry of Plenty”), payments reach their destination.
So what would happen if Catalonia actually secedes? Rajoy does not need to send in troops when he has banks, although he could use the belt and suspenders approach.
Spanish banks, like Santander and the cajas like Caixa/Caixabank, are licensed by the Spanish government. Spain can revoke the licenses of any Catalan banks and could also make it illegal to transfer funds in and out of Catalonia, similar to the sanctions imposed on Iran. Any bank licensed by Spain would fall into line immediately out of the threat of losing its license. It would take the cooperation of the bank regulators in other European countries for them to put similar restrictions on their banks, but given the unified EU position against separatist movements, similar rules would almost certainly be issued on an emergency basis.
As least as important, the case study of Greece 2015 shows that the ECB is perfectly happy to be the heavy as long as it has elected officials giving it political cover.
How this would play out in detail is way over my pay grade, but here are some of the things I imagine would happen:
1. No more stocking of cash in Catalonia’s ATMs
2. Cutting off merchants from electronic point of sale systems
3. Bank closures, as in at least a bank holiday and possible shuttering of banks/bank branches, with what happens to frozen Euro-denominated deposits an open question.
Notice that the measures imposed on Catalonia could be even more brutal than what was done to Greece, which merely behaved very badly in negotiations while having its banking system dependent on ECB life support. A declaration of independence is a much greater act of intransigence.
The Greek negotiations had been going pear-shaped for months, so the ECB had time to think through its moves. Greece was cut off from EPOS and payment systems, banks were closed, and withdrawals from ATMs were limited to small daily amounts. The already-weak Greek economy was prostrated. Importing became virtually impossible; businesses that had managed to hoard enough cash (and hoarding had been going on for months) were either trucking money across the boarder to deposit it in foreign banks or flying to other countries to make payments. Even so, Greece is not self sufficient in food, pharmaceuticals, or petroleum. Fish hauls were rotting on docks because there was not enough gas to truck them inland. The EU made provisions only for the import of critical drugs like insulin. Food shortages were already starting when the Greeks reached a deal, less than three weeks after the ECB lowered the boom.
This deal is simply vicious. This is far and away the most one-sided agreement I’ve ever seen, by an insanely large margin. Even the language is shamelessly punitive. For instance, the document repeatedly mentions that all the previous terms under consideration will need to be made vastly more stringent in light of the deterioration of the economy and how the Greek government needs to prostrate itself to gain the trust of the creditors.
Let us also not forget that in the wrangling before the final breakdown of negotiations with Greece, Spain regularly took the most hardline position of all the creditors, outdoing the Germans.
Again, let us remember that an actual exit by Catalonia would have catastrophic knock-on consequences to Spain and the Eurozone. So a likely strategy would be to impose the most painful economic punishment possible on Catalonia, quickly, so as to delegitimate the separatists, have them turfed out of office (assuming they haven’t been rounded up and hauled off to prison already) and get Catalan back in the hand of a more tractable set of politicians.
The mechanism, as we indicated above, is the control of Spain and other national governments over banking licenses. Not only do they have revocation of bank licenses as the ultimate but virtually never-used threat, but they also have the weapon of refusing to recognize any banking licenses issued by a breakaway Catalonia. As Clive explains:
A newly-independent Catalonia would, as a state, licence such banks as it could (any Catalonia-based operationally segregated entities).
But if that state wasn’t internationally recognised, that would presumably make those Catalonia-issued banking licences useless.
So how quickly would a newly-independent Catalonia get international recognition? The ball then gets kicked back to “politics” from “finance”.
And don’t get your hopes up that other separatist regions like Quebec and Scotland would recognize Catalonia. Neither one of them regulates their banks. Canada licenses all banks in Canada, and the Bank of England, all Scottish banks.
As Clive confirms:
No banking licenses means any cards issued by banks which declared themselves to be “Catalan” based, any merchant services provided by such banks (EPoS terminals) and card network acceptance at ATMs they operated risked being cut off in very short order. The card networks have absolutely *no* apatites for getting embroiled in – or trying to resolve or mediate in – protracted legal squabbles which potentially invalidated card payment processing.
How Spain gets Spanish banks to crack down on their operations in Catalonia could be thornier. Clive again:
Catalan branches of a Spanish national coverage bank (Santander springs to mind) would be entirely different. They would almost certainly have a consolidated national IT Infrastructure with a single central datacentre (or multiple regional datacentres which are unified and synchronisation to act as a virtual central host). The head offices could then, in theory, pull the plug on the Catalan-locality operations.
But – and it’s a big but – they could only do this if, within their consolidated central back-end host they had created localised Organisational Units which allowed them to differentiate, say, a branch or ATM or an account for an individual in Catalonia from one in Torremolinos. They might well have done this to allow for, say, profitability analysis, specific regional legal requirements, sub-branding/logos, language localisation — any number of reasons. I’d say it’s more likely than not that a national bank in Spain would have features in its IT to allow some sort of segregation of Catalan-specific operations. I am referring here to IT and business operations — the balance sheet implications if they were to do this are, of course, another matter entirely.
So Catalonia’s banking capacity could be said to be at high risk of being reduced to any Catalonia-based regional players.
Which in this scenario means they could be cordoned off much as Greece’s banks were and told to restrict or suspend operations.
Now you might say, this view makes banking all too central! Well, if you run a business, access to funds, which in the modern world means access to banking facilities, is essential to survival.
How long Catalonia could hold out if its banking system were put on holiday depends on how much of an autarky it is (as in how self-sufficient it is) as well as how much its citizens are willing to pull together. I suspect Catalonia is even less self sufficient in food, fuel and pharmaceuticals than Greece was. Even though readers report that Catalonians have been withdrawing cash from local banks, as a community, they probably have not been hoarding cash to the degree that Greeks had.
Moreover, Rajoy could intensify the pain by restricting access to Barcelona’s ports (as in blockading some or all imports) and cordoning major roads to speed the arrival of shortages of critical supplies.
In other words, Spain has the ability to break Catalonia quickly if it secedes. And Rajoy is just the sort to impose a vindictive settlement. However, even with the Spanish government being able to inflict considerable pain quickly, political time moves more slowly than financial time. Even if the odds of Spain, being able to install a puppet government in Catalonia, and/or further strip it of its autonomy are high, that is likely to be a longer, more tortured process than forcing Syriza to capitulate to the Trokia in 2015.
And Mr. Market has finally woken up to the risk. From the Financial Times:
After a relatively calm open, the yield on the 10-year Spanish bond jumped to its highest level since March, the country’s benchmark equity index fell 2 per cent and Catalonian bonds were sold.
An escalation in Spain’s constitutional crisis, which last night saw the country’s king, Felipe VI, offer a public rebuke to the Catalonian government’s push for independence, is forcing traders and money managers to pay closer attention.
In a sign that investors are worried, Spanish 10-year bonds were the second-most traded in Europe’s sovereign debt market early on Wednesday, accounting for more than 10 per cent of the total volume, according to data from MarketAxess.
“The ratcheting-up of tensions has negative credit implications for the Spanish sovereign because it complicates the process of legislating policy,” analysts at rating agency Moody’s noted.
The yield on Spanish government bonds is still below the peak it hit earlier this year, although spreads versus Bunds has widened. Perhaps more interesting is that investors don’t fully trust the recent Spanish government guarantee of Catalonia’s debt. Again from the Financial Times:
While Spanish government bonds were in investors’ crosshairs on Wednesday, the pressure on debt sold by the Catalonian government was more intense. The yield on the regional government’s bonds maturing in 2018 — which was as low as 0.9 per cent at the start of the summer — rose to 2.578 per cent on Wednesday, their highest level since September 2016.
As much as I understand and sympathize with the desire for independence, the separatists have done so little in the way of preparation that they might as well be taking on a tank with swords and slings. This is unlikely to end well.
We’ll know more about Puigdemont’s plans soon:
⚠️Catalan President Carles Puigdemont to make official statement on TV at 9pm CET
— Catalan News (@catalannews) October 4, 2017