from ZeroHedge with thanks. Everyone knew, going into last fall and winter, that the waters were about to get decidedly choppy. At the national level, Podemos was ascendant as Pablo Iglesias rode a wave of anti-austerity sentiment straight to the front of disaffected voters’ collective consciousness.
A nation beset by sky high unemployment had grown tired of the PP and PSOE duopoly that had dominated Spanish politics since at least the late 80s. Between Podemos and Ciudadanos, a shakeup was virtually assured.
Meanwhile, Catalonia held what amounted to a referendum on independence in late September and then in early November, the regional parliament approved a resolution to take steps towards establishing an independent republic.
Mariano Rajoy didn’t like that idea so much. “Catalonia isn’t separating from anywhere,” he said at the time.
In fact, a new poll by Metroscopia published Sunday by El Pais shows that PP with 26% against 23.1% for the Socialists, 19.5% for Ciudadanos and 16.8% for Podemos. In other words: new elections wouldn’t solve anything.
Against this hopelessly fraught backdrop, Barcelona is playing a dangerous (if hilarious) game of chicken with Madrid.
Catalonia knows that, even though Mario Draghi is artificially suppressing yields on Spanish paper, and even though the memories of that fateful summer in 2012 when Spain’s borrowing costs spiked above 7% have long faded from investors’ minds, a regional default would be a catastrophe for the central government. Hold that thought.
That very same central government, Catalonia says, is dragging its feet on approving a plan between the regional administration and lenders to extend the maturity of $1.8 billion in Catalan debt.
Catalonia needs Madrid’s approval thanks to the terms of a bailout the region received in 2012. “What we want to do is extend the payment over the longer-term, for that we need the acting government’s approval,” Catalan spokesman Albert Puig tells Bloomberg, who explains that “Catalonia currently finances itself through a national liquidity fund managed by the central government [and] officials in Madrid argue that strict controls are needed to ensure that no funds are used to pay for the push for independence.”
In addition to the payment extension Catalonia wants Spain to approve, Barcelona is apparently attempting to blackmail Madrid into making some of the loan payments. Puig says this is aid money due to the region from two years ago. “Officials in the regional capital Barcelona are counting on Spain to step in and supply the funds they need to meet loan repayments coming due this year, betting the central government will be forced to back down because the costs of a default would be greater for the Spanish sovereign,” Bloomberg writes. “The region already missed payments on at least two bank loans, Regional President Carles Puigdemont said earlier this month.”
Amusingly, Puig (pronounced Pooch) admits that Barcelona is essentially extorting Madrid. The region is trying to convince Spain to cough up the aid money and there’s “no scenario” in which they’ll default, he says. Well, needless to say, that’s not exactly what you want to hear if you’re a bondholder, which is why yields soared on Wednesday:
According to El Mundo, S&P isn’t prepared to wait around to see who blinks first and will not hesitate to put Catalonia in selective default. Here are a few excerpts (Google translated):
The rating agency Standard & Poor’s has sent the Generalitat of Catalonia and the central government that is willing to put its debt as selective default (selective default), as confirmed by government sources.
According to the methodology of S & P, Catalonia not only deserves and continue its current rating of BB- of junk , even in high risk C. Worse, believes that should fall to the D of default , investors default for failing to meet debt maturities. Assigns the SD cited, selective default. The Valencia ran that risk in 2012, but never received formal communication agencies as has happened to the Generalitat.
How to avoid it? “It is necessary that the central government a mechanism to enable security for the loans we make to the Generalitat, the Autonomous Liquidity Fund should be a clear guarantee to investors”, explained in a financial institution creditor of the Generalitat.
The state FLA lends money to interest close to zero to the Generalitat , but does not cover all the debts of Catalonia, especially the short – term. The president of the Generalitat, Carles Puigdemont, already admitted in Parliament last day 3 which was incurring arrears to financial institutions when asked by a member of the CUP credit for BBVA 100 million.
“We have liquidity problems,” said Puigdemont, complaining that the state “hijacks unacceptable amounts of Catalan money”. Moody’s also reported on June 11 that can sink further into junk bond the Generalitat and if they have not already done is for the support it receives from the state.
Right. So from what we can tell, Spain has two choices: 1) hurry it up with the approval for the maturity extension, or 2) make the payments yourself. Or who knows, maybe Catalonia is asking for both.
If Madrid chooses to do neither, Catalonia will threaten to default and that, in turn, would cause Spain’s borrowing costs to soar, a decisively unpalatable scenario amid the current political strife. “A default in Catalonia could trigger a constitutional crisis and could double Spain’s spread. For that reason, allowing a default is unthinkable, it’s a substantial negative for Spain as a whole,” Mark Dowding of London-based BlueBay Asset Management told Bloomberg.
Well if allowing a default is “unthinkable” for Madrid and if Barcelona needs cash, then effectively, Spain will be forced to fund the Catalan government as it outwardly prepares for independence, a rather humiliating situation but one which the caretaker government in Madrid is powerless to change unless Rajoy wants to watch yields on SPGBs double overnight.
Adding insult to injury, Spain is Catalonia’s biggest creditor, holding some 60% of the total.
For Rajoy, this must feel a bit like a punch in the face. And he would know…