Madrid-Barcelona doors still wide open

On September 28, the autonomous Treasury of Catalonia issued €2 billion in bonds maturing in May 2013 and March 2014, at a nominal price of €1,000. From the outside, it appeared that the Generalitat (its original name) had again resorted to sales of more of the so-called patriotic debt to calm the public administration’s urgent financial needs –some €472 million this weekend and €2.64 billion later in November. But that wasn’t the cause of the operation.

It turned out that la Caixa, the almighty bank in Catalonia and third biggest banking entity in Spain, had asked itself the regional government to make the move so the savings bank could exchange an ordinary loan it previously made to the Generalitat for the new bonds.

This way, la Caixa will be able to place the loan among clients wishing to take some Catalan risk into their portfolios, or it could bring those bonds as collateral and extract some fresh liquidity from the European Central Bank.

In any case, Barcelona had to report to Madrid. One of the conditions regions must comply with to receive a bailout from the central government is to give away their debt issuance independence.

Artur Mas’ Generalitat is in line to get slightly over €5 billion so it is safe to guess that, unlike what the current political tensions may suggest, communication is well and alive between Catalonia and the Spanish government in Madrid. In fact, the minister of the Treasury Cristóbal Montoro assured last week while explaining the 2013 Budget that the Fund for Regional Liquidity –FLA in Spanish– is now active and can address Catalonia’s capital shortcomings.

The Spanish Treasury would then have injected part of its €4 billion contribution, according to Montoro’s announcement. The Lotery holding will provide €6 billion and several banks, la Caixa and BBVA among them, are set to add €8 billion to that.

Although talk of secession and failed state has attained alarming tones among observers, the apparent checkmate situation between Catalonia and the Spanish government isn’t so.

Quite the reverse, Spain’s government has a fair chance to square the circle: by introducing a much needed restructuring of the public administrations, it could satisfy Catalan claims over particular national recognition within Spain while relieving the budget of waste. But, as with other matters, president Mariano Rajoy must show decisiveness and listen to what people and markets demand.