Spain has denied Catalonia a referendum on independence, but the Catalans are going ahead anyway, with a vote on September 27 that is a de facto referendum. If the independence side win , they plan on packing up and shipping out in just six months. Alarm bells should be ringing all over the eurozone.
Albert Pont, a financial adviser to the Catalan government, told GlobalCapital this week that if Spain recognises Catalonia as independent after the vote, the region will continue to pay its share of the national debt, which stands at €1.08tr, or 99% of Spanish GDP.
But Spain is determined not to countenance Catalan independence. And if it refuses to recognise the split, Catalonia will not honour the Spanish debt. Since Spain would have lost 21% of its GDP, that would mean an immediate rise in the debt/GDP ratio to 127%.
What may come to pass is anyone's guess, of course. It is possible Pont is putting an extreme view for negotiating purposes. But as opening salvos go, it is a powerful one.
Yet few in the capital markets appear to be taking much note. The prevailing attitude is that we’ll all deal with the problem when it’s a crisis. These are the same people who berated EU officials for fudging their way through previous incarnations of the crisis. Heads seem to be deep in the sand.
Doubtless, the same crowd will be all over the new Catalan sovereign borrower should it appear in the primary markets waving a big bag of underwriting fees around. But one has to wonder how well considered their advice will be if their preparation truly has been as last minute as it appears.
One can only hope, despite the lack of public comment so far, that the European Central Bank, Spanish government and the rest of the EU have more of a plan to deal with what could be a cataclysmic event for the Bonos market and the euro.