Junta pel Si is Promising a Catalan State in Short Order

Catalonia goes to the polls upon September 27.  Although Madrid stymied efforts to hold a referendum on independence, many partisans are declaring the weekend election is precisely such a referendum.  Even if this is not legally true, a victory by a coalition of those seeking independence might intensify the confrontation using the federal government, ahead of the national elections that’ll be held later this year.

The top independent coalition (Junta pel Si–Together for Yes) offers promised a Catalan state inside 18 months of the election.  Although this seems far-fetched, it illustrates likely pressures that will mount.  The actual polls show this coalition winning around 40% of the vote, but just shy of the 68 chairs needed to secure a parliamentary vast majority.  There are other parties, which favor independence but they did not join the Junta pel Si that could type a coalition. 

Catalonia has long sought greater independence.  It is an economically prosperous region that is a internet contributor via fiscal gets in other regions in Spain.   This accounts for roughly 20% of Spanish GDP and has a substantial (~5%) spending budget surplus.  

However, despite what the protagonists are saying, only about a fifth associated with Catalans identify independence as the most significant issue.  About three-fifths say the economy is the most important issue.  Overall, forms suggest about 40% favor independence.  Moreover, the federal government, the central bank, other EU members, and even the football league, warns of a heavy price of secession.  To discourage other regions from breaking away from their countries, an independent Catalonia would not be an EU or EMU member.

While the risk which Catalonia secedes is rather modest, the impact might be quite serious.  Without it, Spain's macro condition deteriorates sharply.  It might embolden other parts of Spain to depart as well.

Spain holds national elections within November or December.  This particular weekend’s vote in Catalonia will not alleviate the political doubt in Spain.  Indeed, the risk is that the election produces no clear winner.  A coalition would have to be forged.  Spain, arguably much more than the UK, is not familiar with coalition governments.  Its elections have created a single party majority since democracy returned after Franco.

The political doubt may also encourage investors to appear closer at Spain's financial recovery.  Spain has loved among the strongest recoveries of the big Eurozone countries over the past two years.  Austerity as well as reforms have slowed as the government positions for the political election.  However, pressure from the IMF as well as EU to resume its efforts will likely resurface early next year.

Spain has under-performed Italy all year long, but pronounced much more in the last three months.  Consider that over the course of the entire year, Spanish 10-year yields rose Thirty eight bp while Italy's fell by 12 bp.  Of this 50 bp under overall performance by Spain, 27 from it has taken place over the past 3 months.

Italian stocks are among the best performers this year among the high-income countries.  The actual FTSE Milan Index is up 11.4% year-to-date.  Spain'utes IBEX is off 7.5%.  Over the past three months, as nearly all equity markets have fallen, Italy is down 10.2% while Spain is off 16.6%. 

The political cloud that dangles over Spain will likely final the remainder of the year, at least.  Its asset markets are likely to underperform Italy, regardless of the precise electoral outcome.

Catalan Election and the Under-Performance of Spain is actually republished with permission from Marc in order to Market