Tag Archives: Catalonian Crisis

Day of Reckoning – Catalonia Part 2

Discussion and Analysis by Charles Porter:


This afternoon, the culmination of the Catalonian independence vote may arrive. We analyse the implications within currency markets, predominantly the Euro. In doing so, we offer you an insight into the likely performance of the Euro when it is potentially confronted by a declaration for Catalonian secession later this afternoon.


Evidently, Spain has long given up the Peseta, therefore, the effect of the Catalonian referendum upon exchange rates will be localised within the Euro. Given that the single currency brings about de facto insurance to a national idiosyncratic risk (c.f. Mundell 1973), it is possible that the Euro will show relative ambivalence to any possible announcement at around 5pm BST today. The price behind the Euro is still derived primarily from the supply and demand for the currency, however, the understanding behind the value of a currency union must be based upon its cross-border nature. In effect, while the Catalonian referendum might credibly be of national significance, on the Eurozone grand stage, any national effect resembles only a regional shock.


The effect within Spanish bonds and equities has certainly been felt. Bonds, for example, are paying a higher yield, reflecting the risk and uncertainty that a Catalonian secession from Spain would create. However, overwhelmingly, these national indicators and markets have managed to remain calm and price the risk modestly. Equities of banks exposed to Spain and Catalonia have been more volatile. These banks have even felt it necessary to insure against a Catalonian secession by insuring their ability to physically relocate and, in the meantime, by adapting their legal headquarters.


Whilst our analysis of Carles Puigdemont highlighted his infatuation and belief in Catalonian independence, the constraints that the region’s President faces may precipitate a more moderated response during his speech this afternoon. If the actions taken by Puigdemont are moderate, meaning anything short of a declaration of independence, then I expect a comparable calm within international markets.


If Puigdemont pursues a democratic (or bureaucratic/diplomatic) and conversational approach then the risk that is priced into the market reflecting the uncertainty surrounding the Spanish and Catalonian economies will be partially priced out – allowing the Euro and affected Stocks and Bonds to appreciate. Open democracy, conversation and mutual agreement lead to more gradual, predictable, and stable processes, rewarding bonds, equities and assets tied to both economies with more value. Therefore, the effect upon Catalonian and Spanish equities and bonds will be stabilising; lowering the yield on bonds and raising the price of equities and assets.


However, in the more unlikely, yet plausible, scenario where Carles Puigdemont achieves and submits a signed declaration of independence then further risk will be priced into the market. Capital will leave the areas most affected by political risk, namely Catalonia and Spain, as uncertainty deteriorates the investment environment. However, given that neither Catalonia nor Spain operate using their own, unique, currency, it must be considered whether the common currency, the Euro, will feel the damage.


Whilst the spill over from Catalonia to Spain is inevitable given the analysis within the preceding article, the significance of Catalonia to the Euro is less certain. Accounting for a little over 2% of total Eurozone GDP, Catalonia is not critical to the output and performance of the Euro, but it is also not negligible. Moreover, the longer-lasting potential spill over effect upon both Spanish and Catalonian GDP, should Catalonia become independent and outside the EU, could be strongly negative, particularly if a tariff barrier to trade becomes effective.


The fiscal significance of the Eurozone and European Union is clearly low; the European Budget contributes for expenditure of around only 1% of Eurozone GDP. However, Spain’s net European Budgetary contribution to the EU budget will be distorted and the vacuum must be filled by international compensation, or left to fall. With the prospects for European integration increasing according to the foreign policy and integration stance of French President, Emanuel Macron, political risk and fiscal reshuffling could be damaging and disparaging.


Perhaps the most valuable present feature of the European Union is the world’s largest single market; free of barriers to entry and internal tariffs. The population of Catalonia as a percentage of the total population of the single market is around 1.5%. To some extent at least, the strength of the single market will be minorly diminished. However, the practical impact of a reduction in potential trading individuals will be negligible given the replenished prospect for further EU accession and an undervalued Euro, for example against the pound, spurring the competitiveness of the Eurozone.


The Euro has shown moderate sensitivity to the progression of the Spanish constitutional challenge posed by Catalonia. Regarding the future, highly moderate strength will be conferred upon the Euro if the diplomatic, gradualised, path is taken. Similarly, if unilateral independence is declared this afternoon, the Euro will suffer immediately, and into the trading day tomorrow.



Although moderately shrugged off by the Euro, the end of trading day spike showing Euro weakness is likely to signal a sell off of Euros before the weekend Catalonian referendum on October 1st. This afternoon’s announcement should prove to be more market sensitive, particularly if the status quo is broken and Puigdemont claims Catalonian independence.

Day of Reckoning – Catalonia Part 1

Discussion and Analysis by Charles Porter:


This afternoon, the culmination of the Catalonian independence vote may arrive. We analyse the implications within currency markets, predominantly the Euro. In doing so, we offer you an insight into the likely performance of the Euro when it is potentially confronted by a declaration for Catalonian secession later this afternoon.


While Carles Puigdemont, Catalan President, prepares to address the Catalonian parliament, the tension inside the Spanish political economy is mounting. Following the now 10-day-old referendum on Sunday 1st October, Puigdemont feels he is vested with a mandate to declare the secession of his municipality from Spain.


The uncertainty and conflict that surrounded the initial referendum should impact markets because it signals the propensity for riots and conflict to ensue in response to developments. When Puigdemont addresses parliament, there is an acute risk that the political composition of Spain, including Catalonia, is exposed. What’s more, underlying tensions that are exposed will likely realise their propensity to generate further conflict. Amidst the uncertainty surrounding the extent of devolved powers, particularly policing, pragmatic and responsible public actions cannot be taken for granted.


The Spanish Prime Minister, Mariano Rajoy, has vociferously displayed his unwillingness for Catalonia to leave Spain. Members of the incumbent Spanish ruling party have displayed uncompromising stances towards the Catalonian establishment and public displaying empathy or active support for secession. For example, threats to arrest political public office holders seem credible and are generating concern. It is therefore plausible that convoluted instructions will cause irresponsible public law enforcement, thereby escalating the tension between the nation and the region.


So Why is Spain such a Big Deal?


There are several reasons why Catalonia is pivotal to Spain and, therefore, why Spain is unwilling to allow the nation to secede. These include, but are not limited to, cultural, geographical, economic, and political. Despite a popular desire for secession, the contentious nature of the debate and referendum indicate that many individuals want to remain a part of the Spanish nation and European Union member state. This is likely to be because, ultimately, despite whatever the future holds for both Spain and Catalonia, they have shared an intricate history. The cultural and social ties across the potential border would inevitably be severed.


Geographically, Catalonia occupies much of the affluent border with France. With the Pyrenees creating an impasse across much of the border, the corner access point within Catalonia is critical. The potential to lose an area of strategic geographical significance, both in terms of trade and individual utility, is threatening for Spain. The political will for the nation to remain ultimately harks back to a realist defence of safety in numbers and solidarity with neighbours. The potential divorce of Catalonia from Spain would upset the current status quo of fiscal obligations and arrangements, threatening to stagnate politics and remove critical offices.


Evidently, economic reasoning is argued to be the most salient factor motivating the exaggerated market responses. Representing around 20% of the GDP of Spain with over 7.5 million inhabitants, the significance of Catalonia, from their fiscal contribution to their purchasing capacity, is a highly valuable national economic attribute. The attractions within Catalonia, not least Barcelona, draw high volumes of tourists each year, bringing a boost to the economy of Spain and the surrounding areas.


In part two of this article, we analyse why the Catalonian question is important to the Euro and foreign exchange markets:

EU banner

Puigdemont leads Catalonia out

Discussion and Analysis by Grace Gliksten:


This article discusses the implications of Catalonia’s independence referendum over the weekend. Following a period of considerable Euro strength, the political uncertainty threatens to halt its gains and shroud the Eurozone economy within doubt.


Falling somewhere between a centrist and a social democrat, Carles Puigdemont started his political career relatively late. He was elected a member of the opposition at Girona City Hall in 2007, followed four years later by his promotion to elected mayor. In 2016, Puigdemont won a vote of confidence in the Catalan Parliament to be named the new President. Born in 1962, Puigdemont worked as a journalist, having dropped out of University. Puigdemont began his political career in the 1980s, founding the Girona district of Juventut Nacionalista de Catalunya.


Puigdemont has been fighting to establish an independent Catalonian state since he took office in January 2016, calling the referendum in June. The second manifestation of this dream gripped markets early this week, damaging Spanish equities and bonds with a mild spill-over into the Eurozone. A fanatic about Catalonian independence; he told Al Jazeera that the wish of Catalans to execute the forbidden referendum “is unstoppable”.


Over the last six years he has been involved in organised demonstrations, and was a protagonist in the last referendum for Catalonian independence, in 2014. Although there was an 80% vote in favour of independence in 2014, the turnout was a meagre 37%. Whilst the most recent referendum has been more decisive in terms of turnout and result, it still paints a picture of uncertainty about the true will of the electorate.


The character and background of Puigdemont individually may prove critical to markets in the next 24 hours. Should the President of Catalonia declare independence following this controversial referendum, the uncertainty effect derived from an area accounting for around 20% of Spanish GDP becoming independent could be catastrophic. It would draw in concerns of fiscal sustainability, both with respect to Spain and Catalonia. Although less salient, the budgetary contributions and fiscal burden sharing within the Union would be upset.


Puigdemont’s involvement in the most recent referendum has not come without risk; Spain’s chief public prosecutor has even refused to rule out ordering the arrest of Catalonia’s president, adding Puigdemont could be charged with civil disobedience and misuse of public funds. Pushing two illegal and non-binding referendums in three years shows a level of desperation by the Catalan government’s fight for independence. Turnout was only 42%, which although roughly 5% up from the referendum three years prior, does in fact indicate that the results do not represent the true desires of the electorate.


Given Puigdemont’s involvement in organised demonstrations, the first, failed, Catalonian referendum and antagonising comments, we might expect his fanaticism regarding independence to guide his political actions. The political power to invoke an independence claim lies with the President. Ultimately, therefore, we may expect his individual motivations to exploit what is a weak, contentious and unconvincing mandate to achieve independence from Spain. While the idiosyncrasies of this weekend’s referendum may be considered by some to mitigate against the illegality of the referendum and mandate generated therein, Puigdemont represents a considerable political risk in himself.


Whether the reasons people did not come out to vote were down to the fear surrounding the harsh response from the Spanish police or the illegitimate feeling projected by the Spanish government, it is not clear. The Catalan Government are suggesting that 770,000 votes were lost as a result of police crackdowns, however taking this figure into account only pushes the turnout to just over 50%. It can still be argued that only 37.36% of the overall electorate voted for independence, which again further illustrates the illegitimacy of the independence result. According to a June poll, support for an autonomous Catalan state has fallen from 44.3% in March to 41.1%.


Without a true and legal referendum, the views of the people will not be truly understood. What is clear is that Spain’s complicated relationship with Catalonia is headed towards the unknown. The harsh police response, coupled with the threats of suspending Catalan autonomy if the decision did come through, can be interpreted as a deep-rooted fear by the Spanish government in the people of Catalonia voting to become independent from Spain. However, this could also be a situation of a politician representing their own ideals instead of the electorate as a whole. Puigdemont’s humble and local beginnings can be used to understand his strong belief in an independent Catalonia, however can also show his inability to understand the real attitudes of the electorate.


Ultimately, the progression of the Catalonian independence referendum reinstalls political risk at the heart of the Spanish nation, European Union and Eurozone. Should Puigdemont capitalise upon the success which he attests to, considerable political and social fall out, within and without the region, should be expected. Ultimately, this develops investors’ unwillingness to operate within the single currency, particularly the Spanish economy. Identifying whether the resilience and capacity for risk sharing embedded within the Eurozone is sufficient to annul or insulate this crisis from the wider macroeconomy will be a critical when evaluating the impact of Catalonia’s referendum.