Catalonia: Much To Do About Nothing And Everything

Artur Mas, the premier, called a snap election when the Rajoy government refused to reset the internal transfers that result in Catalonia paying Madrid more than it receives in benefits. These transfers are one of the factors that lie behind Catalonia's own deficit and debt issues.

Mas has tried casting the election as a referendum on independence. A referendum itself has been rejected by Madrid as a violation of the 1976 constitution.

At one level of analysis, this is a wider problem. Henry Kissinger has argued that there is a crisis of the Treaty of Westphalia that establishes the principle of national sovereignty. We, ourselves, have suggested that the debt crisis is dissolving the glue that holds society together as the cash nexus of creditor/debtor supplants other relationships. Francis Fukuyama, and others, have written extensively about the importance of social trust and the implications of it weakening.

We note that Mas seems particularly inspired by the referendum Scotland will hold on its independence, even though Catalonia has never been independent. Italy's Venice is also making noises about independence. Separately, but similarly, Bavaria, Germany's economic powerhouse of a state, which was helped previously by substantial transfers, now argues that it is tired of subsidizing other German states and wants to modify the current system.

The latest polls warn that Mas and the secessionist movement are likely to be disappointed. Mas' party, the CIU has begun slipping in the polls. His gamble of snap elections may increase the CIU's number of seats marginally at best and still leave it short of a majority. The CIU currently has 62 seats, six short of a majority. The polls suggest it may pick up 2 seats, at most.

What has happened? Outside of some of the elite in Catalonia, few would benefit from Catalonia's independence. It could cause harm to the extent that it would be an precedent for others in Spain, like the Basque Country, and others in Europe. There has been a uncoordinated but effective push-back.

Some businesses in Catalonia threaten to strike against independence by moving their headquarters out of the region. EC President Barroso has indicated that an independent Catalonia not automatically be a member of the EU. It would have to apply like all new states.

There have been articles in the local press alleging that some of the CIU officials have Swiss bank accounts, funding with ill-gotten gains. Prime Minister Rajoy first took a direct confrontational approach, emphasizing he illegal and unconstitutional nature of a referendum. He shifted tactics and now is emphasizing more practical issues like the costs of exit.

Perhaps more telling of the strength of the separatist movement is not how well the CIU does, which after all is the largest party in Catalonia and enjoys the benefits of incumbency, but how well the more radical nationalist party, ERC does. The election may also be a referendum on Rajoy's government. A third place showing, ahead of the Socialists, may be the best that the People's Party can expect.

If the CIU wins an outright majority, it will likely spook investors and weigh on Spanish shares and bonds. Barring that, however, investors will likely take the election in stride. The focus remains on if and when Spain asks for more formal assistance.

Many observers have emphasized the conditions that will be demanded by the IMF and EU. We have argued this is a red herring and the key issue how much the ECB (and ESM) will be committed to driving down Spanish interest rates.

That issue is a bit of a luxury in light of the decline in yields spurred by the simply announcement of the Outright Market Transactions (OMT). We are concerned that the economy is likely to be squeezed further in the new year as the suspension of Christmas bonuses and the start of new taxes take a toll. We also recognize that the country's faces record refunding needs, without the benefit of more long-term repos, that helped in 2012.

Germany, among others, has argued that assistance should be provided only in cases of emergencies. There is no emergency now. Spain is not locked out of the capital markets. In fact, its bond sales on November 22 raised more funds that were initially targeted. Still claims that it is pre-funding next year need to be taken with the proverbial grain of salt. The money raised in bond auctions and private placements this year are more than planned, but so is the budget deficit and the governor of the central bank warned of the risk that next year's deficit target is also surpassed and this is still six weeks before the year even begins.