Spanish Stocks Slammed To 7-Month Lows As Credit Risk Spikes

While the world desperately tries to shrug off the implications of Catalonia's independence vote (and Rajoy's warnings of potential reactions), investors are rapidly exiting positions in Spanish stocks and bonds...

IBEX (the main Spanish stock index) just plunged to its lowest level since March (as European stocks - Stoxx 600 - hits a 4-mointh high)...


And Spanish sovereign bonds are getting clobbered...


But perhaps most worrisome is the explosion in Spanish sovereign credit risk - soaring to its highest relative to Germany since Feb 2016

As a reminder, Catalonia together with its capital Barcelona is one of the most economically-powerful parts of Spain.

Notably, as Statista's infographic below shows that the gross domestic product (GDP) per capita of Catalonia lies closer to that of the Eurozone than of Spain as a whole.

Infographic: Catalonia Closer to the Eurozone Than to Spain | Statista

You will find more statistics at Statista

This in mind, it comes as no surprise that Madrid is by all means opposed to letting go of Catalonia.

As The BBC notes, Catalonia, a wealthy region of 7.5 million people in north-eastern Spain, has its own language and culture. It also has a high degree of autonomy, but is not recognised as a separate nation under the Spanish constitution. Pressure for a vote on self-determination has grown over the past five years as austerity has hit the Spanish economy and people hard.

Why is Madrid so opposed?

Spanish Prime Minister Mariano Rajoy stared down Catalan secessionists when they held a trial referendum in 2014, offering no concessions to their demand for a legal vote.

He has pledged to stop secession, saying it goes against the constitution which refers to "the indissoluble unity of the Spanish Nation, the common and indivisible homeland of all Spaniards".


Which brings to mind the biggest question:

What would happen to Spain in case of Catalonia’s secession?

As GEFIRA explains, in terms of the debt sustainability parameters laid down by the Treaty of Maastricht, it’d be the Eurozone debt crisis 2.0.

As Spain now maintains the second year of 3% GDP growth, an even bigger, immediate fiscal threat is looming. After multiple ineffective referendums in the previous years, this time the Catalan government is likely to finally assert independence. What will it look like against the background of the Maastricht financial requirements?

Debt to GDP ratio

The Treaty of Maastricht says it should be 60%. Spain’s debt to GDP ratio was 39% in 2007, but after the financial crisis it gradually rose to 99.4% today. Should Catalonia leave, there are two possible scenarios:

1. Catalonia agrees to take a share of the Spanish total debt, as a “divorce bill”, because after all it benefited from the government spending in Catalonia itself;




2. Catalonia leaves without taking any share of the total Spanish debt.

In the first case, nothing would change, assuming Catalonia would agree to take the share of Spanish debt equal to its share in Spain’s total GDP. In that case, Catalonia accounts roughly for 20% of the Spanish GDP, which means it would take 20% of the Spanish debt. Given that the Spanish debt is right now almost the same size as the Spanish GDP, calculations are rather simple.

Source: Statista.

The second option is rather dramatic. Without Catalonia, Spanish GDP would automatically shrink by 20%, while having to service the entirety of the debt. The debt to GDP percentage ratio would go from 99.4% to 124% overnight.

Deficit to GDP percentage ratio

The Treaty of Maastricht says it should be 3%. Spain has been way outside it since the financial crisis, with a peak at 11% in 2011. For 2016 it was 4.5%.

Here the problem is understanding how much more tax revenue Spain gets from Catalonia than it gives. Catalonia says 11.1€ billion, Spain says 8.5€.

Either way, as the deficit is calculated as expenditure minus revenue, it would be a hole in the revenue of the Spanish government of 8.5 to 11.1€ billion. Last year the deficit/GDP ratio was 4.5%, corresponding to approximately 50€ billion. With the Catalan secession, assuming a 10€ billion hole for simplicity between the estimates of the Spanish and Catalan governments, Spain’s deficit would go up to 60€ billion, while its GDP would shrink by 20%. Result? The deficit to GDP percentage ratio would be 6.7%, back to 2013.


The doomsday scenario would be Spain waking up with a debt equal to 124% of its GDP and growing, due to the 6.7% deficit, which would take another 4-5 years to be contained. The EU’s response to the possibility of Spanish bankruptcy would be predictable: more austerity. It is important to note that while Spain has been growing for the past two years and unemployment is also decreasing, the recipe chosen by the Spanish government, flexibility of the labour market in the form of temporary jobs, has exacerbated income inequality: as the OECD points out that temporary jobs are low-productivity and thus earn low wages; the precariousness of the job prevents improvements in productivity, thus improvement in wages. The poor remains poor, while the rich gets richer and the gap widens.4)

Boosting GDP and employment statistics with mini-jobs is thus masquerading an issue common to other Western countries: the collapse of the middle class.

Catalan independence could prove to be the last nail in the coffin: either Spain goes bankrupt or is forced to implement even more austerity at the risk of facing a revolution from the economically displaced.

*  *  *

And that's why Madrid doesn't want to lose Catalonia...

Once before, in October 1934, shortly before the Spanish Civil War (1936 to 1939) broke out, Catalonia had announced its independence from the rest of Spain. This prompted Madrid to sent the army to Barcelona.


richCat Wed, 10/04/2017 - 13:56 Permalink

And that's why Madrid doesn't want to lose Catalonia. ......Anyone 'sensible' willing to act broker ? The only way before Madrid decides a disastrous move to send the tanks in as the Catalan leaders go underground to avoid arrest and all goes to pot on the EU's doorstep. Mind you I was once an EU supporter, but now I'm changing my mind that Brussels and the EU commission is the problem.. It needs a 're-boot' away from the Timmermans and Juncker diktat of them aligning with Madrid. Things have to change. 2008, a heck'uva lot of dosh has gone to bailing out Spanish bad bank debt and others in Club med, this could rear again.

Amun Wed, 10/04/2017 - 14:13 Permalink

Why the NATO is not bombing Madrid for its human rights violations commited in Barcelona this week the way it bombed Belgrade in the 1990s?Is it because it does not consider Catalunians to be human beings deserving any human rights?What happened to NATO humanitarian interventions when you need them?

Don Diego Amun Wed, 10/04/2017 - 15:23 Permalink

so you expect Nato to carpet bomb Madrid for a few stitches and the two guys still in hospital? In any case, the foreign affairs ministers of the countries that count do not get the story of what happened from the MSM, they have their own means of information and they know the 900 injured people has been inflated by at least 20 times.

In reply to by Amun

Don Diego Wed, 10/04/2017 - 15:17 Permalink

2.85% drop is that it? but wait here we were told Spain was going to lose 30% of their fiscal revenues (and 0% of the fiscal expenditure). LMAO. Check mate bitches. Go long tomorrow and especially Monday.

Overflow Wed, 10/04/2017 - 15:19 Permalink

Pigdemont, the secessionist leader, just talked in TV. No Declaration of independence in 48h, as they promised (that deadline ended yesterday with no news again) , but they'll start "talking about it" by monday with other secessionist movements, and asked for help and mediation. LOL Translated into ZH'er:  Scared shitless.

Don Diego Wed, 10/04/2017 - 15:30 Permalink

Here is my speculation on what will happen on Monday (I always separate facts from speculation): On Monday Puigdemont will get cold feet as nobody except Venezuela and South Ossetia will recognize them and the infighting between the extreme-left radicals pushing for unilateral independence and the Puigdemont moderates will start. The extreme left is asking Puigdemont to imitate Salvador Allende and die heroically in his palace. I am sure Puigdemont thinks otherwise.

Overflow Wed, 10/04/2017 - 15:30 Permalink

Spain has been soooooo tolerant with unloyalty for decades, that these clowns thought  they could try a coup and the State would not defend. Seccesionist leaders are now like suicidals crying for someone to stop them...

Don Diego freedom1798 Wed, 10/04/2017 - 16:36 Permalink

I am pro-catalan, the real Catalans. A real Spaniard cannot be anti-Catalan as they are one of the peoples that make us what we are for better or worse (as you can see in the Pro-Spain demonstrations Catalan and Spanish flags co-exist peacefully). I have been a ZH member for many years, never intervened much (except occasionally on sound money/libertarian/pro-gun/foreign affairs issues, what an odd "fascist" that I am) as I have the bad habit of just talking about what I know. I am not an expert on the Catalan issue, far from it, but having lived there and disgusted by the dismally  childish level of the debate here, I decided to give a more balanced picture of what is going on there. I am sure most ZHedgers will appreciate my first-hand information.The MSM is lying to you on this issue and ZH, by malice or ignorance, is aligning themselves with the MSM. I am confident time will prove that I was closer to the truth than the MSM. I don't pretend to be a neutral commenter but I am fairly objective, I just think some people want to hear what the "other side" has to say as the MSM is shutting us off. 

In reply to by freedom1798