The closer the referendum, the more draconian Spain’s response. 

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

After years of simmering tensions, the biggest showdown yet between Barcelona and Madrid appears to be just weeks away. On Oct 1, the regional government of Catalonia plans to hold a referendum on national independence, in complete defiance of Spain’s central government in Madrid. As a last show of strength, an estimated one million separatists filled the streets of Barcelona, a city of just one and a half million people, for Catalonia’s national holiday, La Diada, on Monday.

Companies and investors are somewhat less enthused by the prospect of a head-on clash between Madrid and Catalonia, Spain’s richest and fastest-growing regional economy. An increasing number of financial firms, analysts and rating agencies are finally warning that what began as a largely political (and perfectly avoidable) crisis has the potential to spiral into a financial maelstrom that could spread far beyond the borders of both Catalonia and Spain.

Catalonia accounts for almost one-fifth of the nation’s economic output, but for years it’s been locked out from the capital markets and unable to issue its own debt, which is in deep junk territory. As such, it depends on the central government’s national liquidity fund (FLA) for about 60% of its funding, while the central government depends on Catalonia’s tax revenues to keep meeting its financial obligations.

This mutually dependent relationship has been under heavy strain ever since 2010, when Spain’s highly politicized Supreme Court, at the urging of the People’s Party, then in opposition but now in govermnent, decided to annul many of the articles of the new Statute of Autonomy signed in 2006 between Spain’s previous Zapatero government and Catalonia’s regional government, effectively stripping the agreement of any meaning.

The same court, once again at the urging of the PP, now at the head of a minority government in Madrid, just suspended Catalonia’s latest legislative move to allow a referendum on national independence. This time, however, Catalonia’s regional government is refusing to back down despite the ominous threats emanating from Madrid of criminal proceedings. Depending on which side of the fence you’re on, it is either a criminal act of treason or a heroic act of rebellion.

If the Catalan government plows ahead with the referendum, and there’s a sizable turnout, and the majority vote for independence, the financial fallout, both for Catalonia and Spain, could be catastrophic.

Last year credit rating agency Moody’s warned that if Catalonia defaults, given the debts it owes Spain, markets would see it as a Spanish default. According to Dutch bank ING, if Catalonia votes to break away from Spain, it would plunge the region into a long period of uncertainty and could unleash negative effects that “proportionally exceed” those of Brexit.

Uncertainty is already beginning to take its toll according to a recent poll conducted by Metroscopia in which 62% of respondents in Catalonia said they were “worried” about the future of their region, compared to 31% who said they were “excited”.

The boards of Catalonia’s three most important business associations, Barcelona’s Chamber of Commerce, Catalonia’s Employers Association, and Barcelona’s Economic Circle, are also deeply worried. They believe that any action taken by the Catalan government should fall within the confines of the law. But they also lay much of the blame for the current situation on the intransigence of the national government, which has failed “to make a single proposal (to address Catalonia’s concerns) in all these years,” as one of the board’s presidents told the Catalan daily La Vanguardia.

It’s not just Catalonia that will pay the price. In a new report Moody’s warns that Catalan secession would seriously weaken Spain’s overall economic strength. The ratings agency nonetheless expects that Catalonia will continue to form part of Spain in years to come, especially given the number of obstacles blocking its exit.

Those obstacles include the widespread lack of political support for Catalan independence in Brussels and other European capitals (with the possible exception of London), the huge debt load a newly independent Catalonian State would inherent (though, of course, it could choose to default on that debt, albeit with brutal consequences for both Spain and Catalonia’s economies), and the arsenal of repressive measures Madrid is now readying to prevent the referendum from taking place.

The national government has already dispatched over a thousand riot police officers to Barcelona, ostensibly to protect Spanish public buildings. In reality the government doesn’t trust Catalonia’s autonomous police corps, the Mosssos d’Esquadra, to do the right thing on referendum day. It’s also threatened to take criminal action against any civil servants who help to make the referendum possible, including by allowing the use of public buildings as voting colleges. Spanish police have also raided a printer’s suspected of producing voting slips for October’s referendum.

The closer the big day gets, the more draconian the Spanish State’s response is likely to become. Eventually it will be left with one last arrow in its quiver: to trigger article 155 of Spain’s constitution, which would allow it to effectively suspend Catalonia’s regional autonomy. Of course, to do that, it would also have to enforce the decision, which would almost certainly mean sending in Spain’s Civil Guard and perhaps even the army, all in order to prevent a region from voting in a referendum that four out of five local people support, many of whom don’t even want independence.

Such a drastic move will do nothing to restore calm, peace or harmony in a part of Europe that still bears the scars from one of Europe’s bloodiest civil wars. Whether the referendum happens or not, Spain’s richest region is likely to be riven by conflict, division and uncertainty for months, if not years ahead — none of which is good for either Catalonia or Spain’s economy. And the biggest irony of all: the more Madrid tries to pummel Catalonia into compliance, the more separatists it will create. By Don Quijones.

“Significant economic damage” is a “price worth paying” for Brexit, people think. Businesses are not so sure. Read…  Support for Hard Brexit in the UK Hardens

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