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Spain's Black Swan In Muddied Waters As Court Ruling, Political Turmoil Threaten Catalan Secession Bid

On Monday, Catalonia’s parliament approved a “democratic disconnection” resolution which will see the region push to separate from Spain and establish an independent republic. The so-called “democratic disconnection” passed by a vote of 72 to 63 and calls for parliament to create a taxation authority independent of Spain as well as a social security system. Work on those two bureaucracies should begin within 30 days, while the separation process is expected to take 18 months.

This comes ahead of national elections in Spain next month and significantly muddies the waters for PM Mariano Rajoy. As Carlos Flores Juberías, a constitutional law professor and political analyst at the University of Valencia told WSJ, “he has to show firmness, but any action he takes must be surgically targeted to avoid more people rallying around the separatist camp.”

As we also noted, if Catalonia were indeed to break away, it could very well end up costing Spain in the debt-to-GDP department. As DB warned before September's parliamentary elections, "the impact would be significant on the Spanish economy, [as] without an agreement to share the stock of debt with Catalonia, Spain’s’ projected public debt for 2015 would move from just above 100% of GDP to about 125% of GDP. And this accounts only for the mechanical impact. On 21 September Mas stated that if the central government refuses to negotiate, Catatonia might not pay back its liabilities to the central government."

Well in the latest from Catalonia’s secession bid, the government moved on Wednesday to have The Constitutional Court suspend the Catalan resolution. The leader of the secessionists, Artur Mas was told he could be arrested if he defies the order. 

Meanwhile, today Mas made another bit for re-election as Catalonia’s President - and failed. If that seems strange - i.e. that parliament would vote for secession and then not support the leader of the movement for President - consider the following from WaPo, who has the details: 

The leader of a Catalan secessionist alliance promising to break away from Spain by mid-2017 failed again Thursday to get the backing of regional lawmakers for his re-election as president, posing a setback for the economically powerful region’s independence drive.

 

Artur Mas’ candidacy was rejected by 73-62 in the Catalan parliament, with only his “Together for Yes” alliance supporting him. He lost a previous vote Tuesday by a similar margin.

 


 

Lacking a majority in the 135-seat parliament, Mas had been reliant on the support of the pro-secession, far-left CUP group, which has 10 seats. But the CUP has refused to back Mas as regional president, because of his austerity policies of recent years and his party’s links to corruption scandals.

 

The parliament has until Jan. 10 to elect a leader and form a government or it must call fresh elections.

 

The CUP’s rejection came even though it joined forces with Mas’ alliance Monday to approve a resolution announcing a road map to independence. But that resolution needs a government in place if it is to be acted upon.

So basically, Catalonia can’t move forward with a bid to secede without a government in place and parliament is refusing to back Mas even as they back his idea to break away from Spain. They have until January to sort this out or they’ll have to hold another round of elections and this all comes as Spain itself has ordered the resolution blocked and threatened to arrest Mas. To top it all off, Spain has elections in December. 

You can bet that Brussels is watching this very closely. Clearly, this is an extraordinarily tenuous situation and comes just as Portugal Socialists in combination with The Left Bloc and the Communists overthrew Pedro Passos Coelho just days after his reappointment (the latest on that scenario is here).

Put simply: the PIIGS are restless.

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Here's some additional bonus color from RBS' Alberto Gallo

The Catalan independence campaign is aiming high, but the result will be lower: separation is unlikely, in our view. We think greater financial autonomy rather than separation will be the endgame, for several reasons: 

Political discord in the pro-separation coalition. The Catalan pro-independence majority is fragile, as demonstrated by the struggle to elect Artur Mas as Catalan President this week. The Junts pel Si alliance needs the pro-independence CUP’s 10 parliamentary seats in order to hold a majority, but political views are disparate and could lead to further discord in the coming months.  

Uncertainty around Eurozone membership for an independent Catalonia. Under the Lisbon Treaty, Catalonia would need to be recognised as a “state” by all 28 member states, including Spain, for it to gain EU membership. Uncertainty of continued EU membership could deter Catalan voters.

Additional financial costs associated with running an independent state. Catalonia does make fiscal transfers to the central government which it could retain if independent – the regional government claims to have transferred 8% of its GDP to the rest of Spain in 1986-2011. But Catalonia benefits from other kinds of fiscal transfers from Madrid, in the form of defence spending and national security, and infrastructure spending such as hospitals and transport. An independent Catalonia would also likely need to share part of the national debt burden. Catalan debt is currently 32% of its regional GDP (Spanish debt is 98% of GDP).