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Catalan Separatists May Still Pose Threat to Spain: Euro Credit

This content was published on October 14, 2014 - 23:22

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Oct. 15 (Bloomberg) -- Catalan President Artur Mas’s tactical retreat from the referendum on independence he planned for next month may offer bond investors only temporary respite.

Catalan bonds rose yesterday, with the yield on the Spanish region’s February 2020 securities falling four basis points to 2.63 percent. The spread over similarly dated Spanish sovereign bonds narrowed by three basis points. Both could be pummeled should Mas and his allies return strengthened after yesterday’s setback, according to Raj Badiani at IHS Economics and Kristian Toedtmann at Dekabank.

“Splitting up Spain would seriously impair its debt sustainability,” said Toedtmann, a senior economist based in Frankfurt. “If the separatists succeeded, the risk of default would rise considerably.”

While Mas yesterday dialed back his plans for a non-binding referendum on Nov. 9, he set his sights on brokering a joint platform with other pro-independence parties to stand in a regional election. That could lead to a unilateral declaration of independence from Spain, according to his strongest ally, Esquerra Republicana leader Oriol Junqueras.

‘Genuine Relief’

“A genuine, deeper relief would be only if it’s not just off the table but also if the risk of snap elections that are then referendums in disguise are also off the table,” David Schnautz, a fixed-income strategist at Commerzbank AG in New York, said yesterday. “The underlying issue that Catalans would like to cast a vote on independence will remain and may get even stronger.”

The spread on Catalonia’s 2020 paper is still 16 basis points wider than on Oct. 3 when Mas said he was prepared to defy a Constitutional Court ban to hold the independence vote.

Junqueras, who has opened a lead over Mas in opinion polls by pushing for the government to hold the Nov. 9 vote, yesterday offered Mas qualified support for his new goal. Without agreeing to join Mas’s ticket in the next regional ballot, he said he would do everything he could to make the plan work.

“We want to help and we will try to help with all our strength,” Junqueras said in a televised press conference. “If there is a parliamentary majority for a declaration of independence, then it has to be declared.”

500 Basis Points

Such a move could send the yield on Spanish bonds as much as 500 basis points higher, according to Badiani, an economist at London-based IHS. Spain’s 10-year yields dropped four basis points to 2.05 percent yesterday, the lowest level in a month.

The 7.4 million Catalans in the northeast corner of the Iberian peninsula make up Spain’s largest economic region, with annual output of 193 billion euros ($244 billion). That’s about the same as Scotland, where voters last month opted to remain part of the U.K. Output per head in Catalonia is 17 percent above the European Union average, whereas in Spain as a whole, it’s 5 percent below.

Forty-six percent of economists are already marking down their valuation of Spanish bonds or plan to do so because of the risk of a split with Catalonia, according to a Bloomberg survey of 13 respondents. Others are tracking the situation even though they haven’t yet factored it into their models.

“We monitor the Catalan situation closely but we do not apply any specific risk premium for now,” said Valentin Bissat, an economist who helps manage about 8 billion swiss francs ($8.4 billion) Mirabaud Asset Management in Geneva.

The next move for Mas will be to organize an informal ballot for Nov. 9 that will allow Catalans to vote, but won’t have legal force, as he attempts to forge a common platform with Junqueras and two other pro-independence groups.

“The probability of early elections on a plebiscitary basis has increased,” said Nick Greenwood, a Madrid-based analyst at Analistas Financieros Internacionales. “Mas’s declarations today will only give investors a modest amount of short-term relief.”

--With assistance from Lukanyo Mnyanda in Edinburgh, Charles Penty in Madrid, Angeline Benoit in Paris and Andre Tartar in London.

To contact the reporters on this story: Ben Sills in Madrid at bsills@bloomberg.net; Esteban Duarte in Madrid at eduarterubia@bloomberg.net To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net Rodney Jefferson

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