Spain vs Catalonia: the conflict, and the implications


The political situation in Spain garnered much attention last week and over the weekend. There was some speculation that Catalan president Carles Puigdemont would announce regional elections in an effort to ease the tension and avoid action from the Spanish government. Spanish equities rallied on 26 October, but the bounce proved short-lived when it became clear Puigdemont would not follow through.

In the end, Puigdemont finally declared independence after the Madrid government triggered Article 155, which imposes direct rule on Catalonia. Spanish Prime Minister Mariano Rajoy has called for elections on 21 December.

On Sunday, 29 October, a 300 000-strong protest took to the streets of Barcelona to demonstrate in favour of Spanish unity. The pro-Madrid protest was one of the biggest shows of force yet from the so-called “silent majority” in favour of unity. Spanish equities responded well to this show of strength in early trading on Monday, 30 October.

What’s next?

Puigdemont has so far called for peaceful civil disobedience against Madrid. However, independence supporters seem unlikely to make things easy for the Spanish government.

In our view, the key issue for the coming weeks will be whether Madrid succeeds in taking sufficient control of institutions in Catalonia without having to resort to excessive force, which could play into the pro-independence crowd’s hands in stirring up anti-Madrid sentiment and swelling the ranks of these forces ahead of the regional elections.

We think it’s also important to note that even if the pro-independence forces were to win a new regional election, Catalonia would still not become independent.

The Spanish constitution makes this almost legally impossible. In addition, the Catalan regional government doesn’t currently have enough support in Catalonia to win a prolonged stand-off. That said, in such an event, we think the stand-off has the potential to drag for longer.

Read more: Should you have bonds in your portfolio?

So far, broader European equity markets have remained largely unfazed by the crisis. This may be because there seems to be little risk of financial contagion. The availability of the European Stability Mechanism and the European Central Bank’s (ECB) bond-buying programme essentially provides the eurozone the instruments to stop any knee-jerk market panic.

The major economic impact of the stand-off seems so far to be limited to a shift in the tax base from Catalonia to other regions of Spain as companies relocate their legal headquarters.

In our view, this should not damage Spain’s economy overall. The political contagion risk also looks to be remote. There is some disparity between the promises of the Catalan pro-independence populists and what may be a more harsh reality. At any rate, we could see voters elsewhere dissuaded from going down a similar route should the independence effort fail.

We think that the key point for Spain’s longer-term political stability will be in the severity of the approach of the Spanish authorities as it intervenes in Catalonia’s affairs.

ECB confirms asset purchase tapering

The other closely watched event last week was the ECB monetary policy decision, on 26 October. The central bank announced that it would extend its bond-buying purchases from January 2018 to September 2018, reducing the amount from €60 billion per month to €30 billion.

Rates and forward guidance remained unchanged, as expected, and the central bank stated that rates would remain at present levels well past the horizon of net asset purchases. The ECB also reiterated that it stands ready to increase asset purchases in size/and or duration if needed.

While the ECB’s move was in line with consensus expectations, there had been some speculation that the reduction would be larger.

As a result, some observers deemed the ECB move to be a little dovish. The euro sold off, posting its biggest weekly loss of the year. Meanwhile, European equities enjoyed a subsequent boost