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Catalans Warming Up the Summer Months

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As we move into the second half of July, most Europeans are thinking about – if not already taking – their holidays. The six weeks between mid-July and the end of August are an obligatory window for vacation for many companies in the Old Country and so the masses throng to the beaches of the Mediterranean, Adriatic and Black Sea coasts, including even the politicos and their families. But while everyone else is getting their sun creams and parasols ready, the Catalans are as busy as bees. Their national holiday – La Diada – is on September 11th and their proposed date for a referendum on separation or continued union with Spain is on November 9th: that is not much time at all, so no one is kicking back just yet.

The Catalans are working on a number of fronts to attract international attention while also gaining credibility with key players like bond markets and potential foreign investors. This is important for pro-independence Catalans for a number of reasons. For one thing, they wish to counter the powerful message put forth by the Spanish government that the Catalans are being misled by a few extremists who are off their rocker. Since the Spanish government has enormous influence over the Spanish media[1], and the Spanish media has a far greater reach than anything the Catalans have available, this is the message that reaches most people with only superficial interest in the subject. By drawing attention to themselves and their efforts, they are fulfilling Thomas Jefferson’s old injunction that: “a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.”[2]

To that end, the Catalans are addressing themselves to 10 world leaders over the course of the next few months. The have started with Jefferson’s successor in the White House, Barack Obama. On Sunday, the good citizens of Badalona unveiled a street banner with the American President’s face in the center and the caption: “Mr. President, Catalans Vote Freedom #9N2014”. In case the President should miss the point, they made the banner 100 feet long and bright yellow. There was a second banner showing a large black-and-white ballot box with a message directed at Catalans: “It’s Time: #SíSí”. The two “sí’s” (Catalan and Spanish for “yes”) refer to the two questions that the Generalitat plans to put on the ballot in November: 1. Should Catalonia become an state? and 2. Should that state be independent? The pro-independence people would like their countrymen to answer yes to both questions and thus lend the government a popular mandate with which to proceed towards a negotiated independence from Spain.

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Recognizing that the United States is not the only – nor even the most important – nation in sustaining the Catalan drive towards a referendum and eventual independence, additional banners of key world leaders are planned: Angela Merkel, François Hollande, David Cameron, Matteo Renzi, Ban Ki-moon, Dilma Rousseff, Pope Francis, Fredrik Reinfeldt, Martin Schulz, and Jean Claude Juncker[3]. It makes for an interesting selection of leaders. The “Big Four” in Europe are obvious choices, especially Kanzlerin Merkel who is really going to have a lot to say about the outcome of any unilateral declaration of independence on the part of the Catalan Parlament. Ban Ki-Moon and Pope Francis are also understandable inclusions, if only because humanitarian and spiritual interventions will be called for should Spain react badly to the potential divorce. Messrs. Schulz and Juncker are also necessary inclusions, though the Catalans waste their breath, especially with Mr. Juncker who is of Mr. Rajoy’s same party at the European level.

Dilma Rousseff and Fredrik Reinfeldt are curious choices, however. Why the leaders of Brazil and Sweden? Why not the leaders of Ireland and the Czech Republic, for example: two European nations whose own historical experiences would seem to incline them towards support for Catalan aspirations? Or for that matter, why not Xi Jinping and Shinzo Abe: China and Japan might not be politically interested in Catalonian independence, but their companies undoubtedly are and foreign investment will be a key consideration in the future success of an independent Catalonia. Additionally, their inclusion would have sent a clear message to Europe: “Kick us out? We have options.” Perhaps not the most pleasant or desired options for the Catalans, but no one ever secured their independence without paying some kind of price.

chinajapan

Getting their message out to the world is one key area of work for the Catalans. The other is to make sure that their aspirations are taken seriously and viewed as credible. To that end, the Catalans have been working very diligently indeed, with many important contributions coming from volunteers. A prominent Catalan judge and noted expert in constitutional law, Santiago Vidal, has been leading an effort to provide a future Catalonia with a working constitution[4]. This has caused Spanish authorities to consider sanctions against him, including a possible end to his career as a judge[5]. Additionally, prominent Catalan economists have been analyzing the impact of the transition to independence on different sectors of the Catalan economy and fiscal balances. One of the most important areas of international interest is in the treatment of the Catalan and Spanish debt, which has also been covered in a report issued on Monday by the Council on National Transition (Consejo Asesor para la Transición Nacional, CATN)[6].

The report makes clear the Catalan stance: the new state would be perfectly willing to negotiate the assumption of a “fair share” of the national debt so long as the Spanish government recognizes Catalan independence. “Fair” does not include debt contracted for infrastructure projects outside of or that do not directly benefit Catalonia; but otherwise, all the rest of the Spanish debt is on the table. This is not earthshaking news; but it is one of the major levers the Catalans have with which to move the Spanish state into negotiation. If Catalonia declares independence and Spain refuses to negotiate – including backing immediate admission of Catalonia into the EU – then the Catalans will repudiate any share they might have of the Spanish national debt. Spain’s “official” debt-to-GDP ratio would immediately shoot up above 125% – which could make bond traders queasy and lead to much higher premiums for the Spanish sovereign.

Bond markets today are not exhibiting any signs of anxiety over the possible break-up of Spain and the impact this will have on their money. This is clearly shown by the differential between the 2-year and 5-year yields on Spanish bonds:

spainbonds

There is a slight inversion[7], which indicates some degree of uncertainty, but it is not wide enough to be indicative of any panic over the political situation. There are three reasons why this might be so:

  1. Bond traders work on ultra-short time horizons and so eventualities of November are still far in the future for them;
  2. Bond traders are discounting the possibility of Catalans actually holding a referendum and declaring independence;
  3. Bond traders are not discounting the possibility of a referendum and independence, but are counting on a negotiated outcome rather than a violent break-up.

All three scenarios are plausible and, in fact, all three might be in operation for different traders in different markets. It is my belief from conversations with traders I know in Spain and the US that #1 and #3 are the primary motives for so low a yield on all Spanish issues. In any event, the purpose of the CATN report is clearly to reassure international debt markets and to focus the story on #3. The Catalans might have wanted to include Lloyd Blankfein[8] on one of their banners.

There is reason to believe that the report is accurate, at least as far as intentions go. Europe has already gone through one major cycle of bank restructuring and recapitalization and the calamitous demise of Banco Espiritu Santo this week has demonstrated just how fragile that process has been. Come November, Mario Draghi is not going to want to see Europe’s fifth largest economy spiral into chaos; nor is Angela Merkel going to want to explain to German taxpayers why they must bail-out the Spanish financial sector because the Castilians and Catalans can’t get along. The pro-independence group is betting that “money talks, everything else walks” and that the risk of economic chaos and financial disruption will cause Europe’s guiding powers to prefer negotiation over force.

It is a big bet: Spain does not have a very encouraging history when it comes to swallowing their pride and cutting their losses. All of this assumes that the referendum is even allowed to proceed and that the “yes-yes” vote wins a majority. I still believe it likely that Spain will intervene prior to the referendum, precisely because they can game out subsequent events as well as anyone and do not wish to be put in that position. Block the referendum, however, and you deny the Catalans any democratic legitimacy to declare independence.

The CATN report deals with that contingency as well: if the referendum is blocked, President Artur Mas will call for early elections on the sole platform of independence. Though less desirable than a recognized and legal referendum, the result would still enable the newly formed government to declare a popular mandate for action. What action? In every case, the CATN recommends that the Generalitat open negotiations with the Spanish government in order to agree upon the terms and mechanisms of the separation rather than presenting Madrid with a fait accompli. A unilateral declaration of independence would only be a final resort in the face of permanent denial and refusal. Good luck with that.

There is some hope however. Mariano Rajoy’s government has recently shown signs of a slight thawing of their position on talking to the Catalans. Whereas a few months ago, the abandonment of the referendum demand was an a priori condition to holding any sort of substantive discussion, Mr. Rajoy is now indicating that he is willing to receive Mr. Mas at any time to discuss anything[9]. This might be indicative of the influence of newly crowned King Felipe, seeking to at least foster a dialogue; it might also be political maneuvering to avoid the label of “obstructionist”. For his part, Mr. Mas has indicated that he has already asked for a meeting during Felipe’s coronation last month, but that no one in the government has gotten back to him[10], and that he has the impression that they never will. The Vice President, Soraya Sáenz de Santamaría, then declared that no “official” request had been received from the Generalitat and that’s what they were waiting for.

The two men who hold their respective countries’ future in their capable or incapable hands are engaged in a schoolyard match of “no you didn’t”, “yes I did”, “no you didn’t!!” Yet that is not surprising: both sides have an interest in extending this game of chicken for as long as possible in the hopes that the other side blinks first. The alternative involves riot police, water cannon and perhaps martial law. No one wants to contemplate that at this point, though both sides undoubtedly are doing so in a very careful and surreptitious manner. Yet time is on Mr. Mas’ side: unless someone stops them, the Catalans will hold their referendum on November 9th. The onus of intervention lies with Mr. Rajoy, and the fateful consequences of that decision upon his citizens.

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Sources and Notes:

 

 

[1] I would never be so bold as to say “control” but high-ranking people have been fired, and large advertising budgets have been pulled when papers published articles critical of the current government.

[2] Thomas Jefferson et.al., “The Declaration of Independence”

[3] Respectively: the Chancellor of Germany, the President of France, the Prime Minister of the UK, the Prime Minister of Italy, the Secretary General of the United Nations, the President of Brazil, the Pope of the Catholic Church, the Prime Minister of Sweden, the President of the European Parliament and the President-Elect of the European Commission.

[4]“El juez Santiago Vidal ratifica que participó en redacción de la constitución catalana,” La Vanguardia, 26 May 2014

[5]At the time of publication, I have no further news of any actions against Mr. Vidal. The case against him appears to have been dismissed.

[6]Notes de premsa, “El Govern rep quatre nous informes del Consell Assessor per a la Transició Nacional,” Generalitat de Catalunya, 14 July 2014

[7]In a “normal” situation, bond yields for shorter issues should be lower than yields for longer issues, since there is less risk associated with predicting performance over one year than over 10 years. An inversion refers to a situation when the short-term yields go above the long-term yields, indicating that traders are more nervous about proximate events than about the future stability of the debt.

[8]Chairman and CEO of Goldman Sachs

[9]“Rajoy reitera que Mas tiene las puertas abiertas: “Si me llama mañana, viene mañana,” El Economista, 09 July 2014

[10]“Mas dice que ha pedido una reunión con Rajoy,” El Diario Vasco, 11 July 2014

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