The current stalemate between Catalonia and the rest of Spain has not escaped the attentions of rating agencies either. Earlier this month, Fitch announced that prolonged stalemate over the Catalan question could lead to instability in Spain´s future credit rating. The agency noted that “tension could trigger some near-term deposit outflows, particularly affecting Catalan banks, increase the cost of funding and drive corporate to reduce capex in the region as a protective measure.”
That scenario was one of three possibilities put forward by the rating agency in assessing Spain´s outlook. The most likely scenario, points to further consultation between the central government and the Catalans, which will ultimately lead to greater fiscal autonomy vis-à-vis the one currently enjoyed in the Basque region.
Artur Mas´CIU party have been engaged in a game of chicken with the central government for the past number of months. Mas declared that Catalonia would vote on November 9th, only to be over-ruled by the Government and the constitutional court. In the end, Mas was the first to flinch.
His alternative “non binding consultation” is being treated by many Spaniards as an act of foolhardy defiance which has served to weaken the hand of the independence movement.
Reports have been quick to point out that those who voted were 80% in favour of independence. Yet it has been largely overlooked that almost 60% of those eligible chose not to turn out in Sunday’s vote. With turnout reported at 41.6%, it can be argued that a majority of those eligible to vote chose to follow the directive of the government in not recognizing the validity of the consultation. Such a figure would appear to point towards a desire for consultation between the Madrid parliament and their counterparts in Catalonia.
Catalan turnout in the 2012 election reached 68%, meaning Sunday´s consultation actually saw a substantial drop off of 27%. Thus, rating agencies talk of a “disorderly break up” of Spain appears speculative in the extreme and slightly irresponsible. It ignores the political dynamic on the ground, which is a far cry from the picture of inevitability being painted by secessionists.
Sunday´s vote merely served to emphasise that the only way forward for Catalans now can be consultation and negotiation with the government. It would appear that is the wish shared by a large number of Catalans. While Mas had been hoping to claim a watershed moment in Catalan politics, the reality is he finds himself in the exact same position he was in on Saturday. His act of defiance will have made negotiations more difficult.
Given that is the most likely scenario- and that Sunday’s vote was not a recognized poll in the eyes of the Spanish constitutional court- Why do rating agencies feel the need to speculate about these adverse scenarios at all?
Not to be outdone, JP Morgan has urged its clients to refrain from investing in Spanish debt at yields of 2.1%. Instead they are encouraging investment in Irish sovereigns at a lower rate of 1.7%.
Yet “a disorderly break up” appears not only implausible but also impossible. That hasn´t stopped rating agencies encouraging speculation on such an unlikely outcome. For now, investors in Spain can sleep easily. There is a way to go before the outlined adverse scenarios arise. In the meantime, all parties must work through actual political reality.