Spain: Last minute agreement for Catalonia - ING

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 11, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Geoffrey Minne, Economist at ING, notes that the broad pro-independence movement finally empowered Carles Puigdemont to replace Artur Mas as President of the Generalitat of Catalonia as the small far-left separatist party CUP eventually succeeded in forcing Mas to step down.

    Key Quotes

    “The pro-independence movement moves up another gear by forming a majority government in the Catalonian parliament. Artur Mas agreed to step down in order to secure the support of a few representatives of extreme leftist party CUP. The new leader is Carles Puigdemont, the current mayor of Girona, the previous director of the Catalan News Agency and a strong pro-independence militant. As a reminder, the broad coalition lead by Mas revolves around the project of creating an independent country in 18 months. In the short run, the focus is on the creation of a central bank and a tax agency.

    In Catalonia, the majority government is now empowered to take the political steps towards independence given that they already announced they will ignore the statements from both the Constitutional Court and the care taking government. However, even if the political process seems to be on a roll, some headwinds remain strong, for example, the public financing issue should remain problematic in the next months.

    The regional debt has tremendously increased in recent years going from less than 10% before the financial crisis to 33.6% of Catalonian GDP in 3Q15. During the crisis, the regional government has greatly benefited from the financial support from the national government and its rescue fund. The Catalonian bonds are still ranked as junk by S&P. If no rescue could be expected from the central government, borrowing costs could rise dramatically and be difficult to carry for the Catalonian government.

    The pressure is now on the political leaders at the national level and the fact that no government has been appointed yet cannot reassure the financial markets. The key Spanish financial index, the IBEX 34 reached on Friday its lowest value since September 2013. This pressure could play in favour of a grand coalition as experienced in Germany in recent years and would involve the liberal PP, the socialist PSOE and maybe the newcomer Ciudadanos. A so-called unionist coalition would be highly unstable but would represent an important message sent to the nationalist Catalonians

    All in all the cocktail of a pro-independence government in Catalonia and continuing uncertainty at the national level is no good news for the still fragile Spanish economy and should not be welcomed by financial markets. A grand coalition could lower the temperature but for the moment no agreement is on the table. The Catalonian question is set to remain an important drag on the Spanish bond market.”
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