PREVIEW: Catalonian Referendum on Independence – Sunday 1^st October

BACKGROUND

Despite opposition from the Madrid-based government, the regional government in Catalonia remains committed to holding an independence referendum this weekend. However, despite, the Catalan government passing legislation to hold the referendum, the quest for independence was dealt a blow after the Spanish Constitutional Court declared the referendum unconstitutional.

WHAT WOULD BE THE ECONOMIC IMPACT?

For Spain: Capital Economics highlights that despite making up just 16% of Spain’s population, the region accounts for around 19% of GDP and 25% of exports, which would subsequently leave Spain with a larger fiscal deficit in the event of independence. Overall the impact of independence would likely provide a dent for the nation’s economic confidence, but is ultimately not expected to have too severe an impact for Spain’s economy as a whole.

For Catalonia: Despite moving to a potential budget surplus from stopping transfers to Madrid, the Catalonian government would likely end up with a higher share of central government debt (due to its share of Spanish GDP, which would subsequently raise its debt-to-GDP ratio. There is a risk that the fallout might lead to a move higher in Catalonian interest rates, which would make it more difficult for the region to service its debt. Further, in what would most likely be a forced departure from Spain, the EU would find it politically difficult to support Catalonia as a member, and thus the region would face increased trade barriers which could have stark impact on the local economy.

WILL THE VOTE GO AHEAD?

Essentially, the lack of legitimacy behind the vote is likely to have a significant bearing on voter turnout, the potential result and whether or not the vote actually takes place. More specifically, just 41.1% of the Catalan population are actually in favour of independence, 49.4% are against and 9.5% are undecided, according to polling by the Opinion Studies Center conducted in March. The poll also found that in the event of the referendum not being granted legal status, voter turnout would be reduced to around 67.5% of which, 62.4% would vote for ‘Yes’ and 37.6% would vote for ‘No’. Therefore, the ‘Yes’ camp would likely be announced as the victors, however, this would likely be as a result of a ‘protest vote’ rather than a reflection of the actual voting intentions of the region as a whole.

Voter turnout is also tspaneatened by some of the recent actions taken by Madrid, which tspaneatened Catalan officials who are caught facilitating the vote with punishments, up to and including jail time, whilst also ordering police to search ballot boxes for voter lists. Further, despite challenges from the Constitutional Court, Madrid has also assumed control over parts of the Catalan budget. It is, therefore, becoming increasingly likely that, given the clout of the Madrid government and its willingness to take actions on those involved with the referendum, Catalonian officials may choose to abandon the vote if their position becomes untenable.

WHAT HAPPENS NEXT?

If the vote goes ahead: The impact of the vote if ‘Yes’ will most likely depend on voter turnout which could be hampered by Madrid’s actions. If turnout is very low, officials may not be willing to declare independence and thus would put a halt to proceedings. Conversely, in the unlikely event that turnout is high and a ‘Yes’ vote is declared, Rabobank expects any measures to be gradual and non-provocative. However, given the control the Madrid government has over the region’s liquidity, Rabobank highly doubts that it would get to this stage and instead, both parties would enter into talks.

If the vote does not go ahead: If the vote does not take place, it is then likely that both parties will come to the table in order to help heal the wounds of the recent conflict and to avoid similar ploys by the Catalan government in the future. In terms of what could be achieved on this front, it would likely revolve around greater autonomy for Catalonia, however, reaching such a compromise will be no easy task for either side; a view backed by Barclays.

MARKET REACTION

In terms of a market reaction, given the unlikelihood of Catalonia formally separating from Spain, the impact for EUR should be relatively limited with the event expected to have little long-term bearing on the broader Euro-area economy. If Catalonia was to formally initiated independence procedures then this could have some bearing on European assets as it could trigger similar sympathetic movements across the continent, however, this is seen as very unlikely. From a more Spain-centric perspective, yields could rise if tensions between Madrid and Catalonia continue to persist given markets typically operate with caution amid political uncertainty. However, this may have more of a short-term bearing on the market rather than a long-term one as Madrid will most likely offer some concessions to Catalonian down the line to break the political stalemate.