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

International banks are warning their clients of the risks and are unanimously negative. This is because:

Catalonia has a problem of public and private debt. Where will Catalonia find the €12bn it needs to refinance in 2013 and €8-9bn of annual credit? The difficulty experienced by Catalonia in seeking to access capital markets has been evident as shown by the forced issuance of “patriotic bonds” to retail investors to pay for current expenses. With mounting “transition costs” and large refinancing needs in 2013-2015 investors would question a country, Spain or the severed Catalonia, which uses its financial resources to cover current spending. 

If independent, Catalonia’s debt to GDP would rise to 72 percent after absorbing its share of state debt, would see lower revenues, while expenses from the transition costs could reach 5.6 percent of GDP according to the above mentioned international banks.

The Catalonia government, the Generalitat, often compares itself to Ireland or Finland. Yet private and public debt together exceeds those of both countries. Its government spends €400 million a month in salaries and bills, with more than 150 licensed official cars and public spending is now €33.5 billion annually. 

For comparison, the largest industrial company in Spain, which is seven times the size of the GDP of Catalonia, pays about €700 million a month in salaries, including senior management, and has only seven licensed official cars. 

Even if we assume Catalonia stays in the EU and that financing is available, according to internal and the above mentioned banks’ analysis, loss of GDP of Catalonia could be between nine and 15 percent; the loss of GDP for the rest of Spain could be between three and five percent. Loss of jobs in Catalonia could be close to 350,000 and a very similar figure in the rest of Spain.

Total value destroyed could be close to €50 billion – roughly the cost so far of the entire economic crisis in Spain since the real estate bubble burst. This is even if the new state were allowed to remain in the EU and in the euro zone. But the European Commission (EC) and Mr Barroso – president of the EC – have warned as recently as Friday that it wouldn't be possible. In that case all the negative economic data would be further impacted by a collapsing currency.

However, the biggest risk to investors and bondholders of this independence agenda is the less-than-subtle calls from the Catalan authorities for implied default or a complex, long process of financing negotiations with the Spanish government. The Catalan government states in its November investor presentation (“Managing Finance and Treasury under FLA”) that “there would be no disruption for the financial community in the eventual scenario that Catalonia would become independent as the Spanish Treasury would be the main creditor”.

This perception that the new state would simply renege from its share of debt and move on as if nothing had changed seems simplistic to say the least. The succession of “credit events” would lead to private and public defaults and investors would not be there to finance instability and credit risk.  

The message reads very negatively whichever way one wants to look at it. It means that Catalonia would not comply with its share of national debt or force a credit event and eventual default on it. Even worse, it threatens to put the rest of Spain in a more stressed financial situation.

That is not good business when one looks for “dialogue” especially as Catalonia “exports” more than 57 percent of its goods to the rest of Spain, its companies and banks have almost 60 percent of their assets in the country, and faces more than €100billion of debt outstanding. The credit implications of lengthy negotiations would be devastating for private businesses and government alike.

In the credit market two separate countries do not have the same access to credit as they had united. It’s never happened. Catalonia would exist; let’s not say it's impossible, but annual available credit would quickly fall as we have seen in every other historical precedent.

In such an environment, it’s difficult to imagine how investors would react positively to secession, either with its own new currency (massively depreciated) or within the euro. Uncertainty and lack of clarity, as we all know, are enemies of business and job creation.

Few investor sit waiting to see if the impact of independence on GDP is 5 percent or 15 percent. There is no business sense in secession, for Catalonia or Madrid. It is extremely negative for both. 

Daniel Lacalle is a Fund manager. Voted Number 1 Pan-European Buyside Individual in General and Oil & Gas categories in Thomson Reuters' Extel Survey 2011, the leading survey among companies and financial institutions

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