An independent Catalonia would be bad business

It’s difficult to imagine how investors would react positively to secession. Uncertainty and lack of clarity, as we all know, are enemies of business and job creation

How's the forecast reading there?
Daniel Lacalle
On 20 November 2012 15:20

On Sunday, November 25th, Spain will see another regional election with profound implications for the country, the Catalan elections, in which the traditional messages of more fiscal sovereignty have been overtaken by an unequivocal secessionist agenda, promoted this time by the party in government, CiU.

Catalan separatists argue that the central government of Spain is stealing Catalonia’s money and that the region would thrive as an independent state. However, careful analysis shows that it is unclear to say the least.

The economic figures show that Catalonia is suffering, like Spain and most of Europe, from a bloated administration and unnecessary spending, but these problems would not be solved through independence. Rather the contrary, more taxes, more public spending, and the creation of more administration bodies has been the norm in all secessions since the 1970s.

Economic data also shows that the separatists’ image of an “economic powerhouse” forced to subsidize the other Spanish regions and being looted by the central government is far from real. 

So far in 2012 Catalonia has received from the State €11 billion more than its share, apart from the funds needed for its financing, according to official figures. Furthermore, according to various studies from tax experts, Catalonia’s much repeated “Spain steals from us” comes from an alleged €16bn fiscal deficit with the State which is actually a €4bn fiscal surplus. This is because the region does not recognise its real share of the costs of ministries, justice, defence, research, social services or state debt repayment when accounting for its “deficit”.

Not only this, but the State has guaranteed €331m for Catalonia bond maturities. The dependence on financial aid from the state is very relevant, as Standard & Poor’s noted in its downgrade of the Catalan region to non-investment grade status.

Catalonia’s debt multiplied by four times since 2004, reaching 20 percent of GDP compared to seven percent in the Spanish regions of the Basque Country or Madrid. This happened just as the level of autonomy increased to be one of the regions with the highest level of economic and institutional sovereignty in the OECD.  

The previous president of the regional government, the Generalitat, Mr Montilla, actually called the financing agreement for Catalonia “the best in history”. The number of public workers in Catalonia soared to 306,500 – four percent of the entire population of the region – and its deficit ballooned to three percent. Furthermore, the number of regional government owned companies increased by 70 percent between 2008 and 2011.

More than 19,500 businesses have closed in Catalonia in 2012. A large proportion of those have relocated to more competitive countries, Morocco among them.  Business does not flourish in a period of credit, social, and institutional uncertainty. 

And it’s tough to see how any of these closed-down businesses will come back to an independent Catalonia. With 646,000 unemployed, a 20 percent rate, Catalonia should not take the risk of experimenting and seeing how it goes.

Recent reports by international banks from JP Morgan to UBS, RBS, Nomura and others have warned about the market, business, and credit implications of secession.

If we look at the Catalan bonds, despite recent state guarantees through the FLA (Regional liquidity Fund), a €5bn bailout, and the optimistic figures given on the possible independence, they are still trading at a risk premium to the Bund of about 700 basis points and with an average of 16 percent discount for the 2015-2016 maturities. This does not indicate any kind of institutional credibility or optimism about the regions’ finances. 

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