By Samantha Barnes – samantha.barnes@internationalbanker.com

Following years of unrest with the Spanish government, Catalonia’s independence movement managed to secure a historic election victory on September 27. The two main pro-independence parties—Junts pel Si, the main force for independence, and radical left-wing separatist group CUP—won 62 seats and 10 seats respectively, giving the movement a majority of seats in the regional parliament (72 out of a total of 135). Crucially, however, with 47.7 percent of the total votes, the two parties fell short of the outright majority percentage of votes that would be required to justify holding an official referendum on independence from Spain.

Prior to the regional election, numerous Spanish banks issued a stark warning regarding the potential risks that would likely emerge in the wake of Catalan independence. In a joint statement on September 18 by Spain’s two main banking associations—the Spanish Banking Association (AEB) and the Spanish Confederation of Savings Banks (CECA)—Spanish lenders asked specifically for “reforms” in order to ensure Catalonia remains a part of Spain. Importantly, the statement was endorsed by Catalonia’s two biggest lenders, Caixabank and Banco Sabadell, as well as Madrid’s banking giants Banco Santander, BBVA, Banco Popular Espanol SA and Bankia, and foreign lenders active in Spain including Barclays, Citibank and HSBC. The statement explicitly warned that independence for Catalonia would prompt banks to “reduce banking supply,” on the basis that those remaining in the region “would face serious problems of legal uncertainty”. Such action would result in Catalonia facing isolation, a credit crunch and, with credit ultimately scarcer and more expensive, a substantial increase in borrowing costs. The statement also claimed that independence would result in “exclusion from the EU and the Eurozone”. This would mean that the new state would not be able to use the euro, and would thus have to adopt its own currency.

Catalan business leaders also weighed into the debate, with the president of Catalonia’s main business association, Foment del Treball, suggesting that secession could cause “enormous financing difficulties” at a time when businesses “do not want these processes to disrupt the economic recovery”. Treball wants the Spanish government to seriously negotiate with the Catalan government and ultimately grant the region more fiscal autonomy and cultural recognition.

In their recent comments, the European bodies themselves have made clear the grave consequences of a full Catalan split from Spain. European Union (EU) Vice-President Valdis Dombrovskis stated recently that a newly independent region would no longer be subject to EU treaties but that it would be able to re-apply for membership. European nation leaders have also stated in near uniformity that an independent Catalonia would be left out in the cold, at the very least on a temporary basis. UK Prime Minister David Cameron, for example, asserted in early September alongside Spanish Prime Minister Mariano Rajoy that a state that secedes is no longer part of the EU and “has to take its place at the back of the queue behind those other countries applying to become members”. Additionally, the European Commission has previously said on numerous occasions that any new state wanting to be part of the regional union would have to apply for membership. However, given that no region within the single currency union has seceded since its creation in 1999, the situation of an independent Catalan state would be entirely new legal territory for the Eurozone. A recently published report from left-wing Spanish think tank Fundación Alternativas, however, suggests that the legal implications are fairly straightforward, concluding that not only would an independent Catalonia not have access to European Central Bank (ECB) financing, the European Stability Mechanism or the European Investment Bank, it would also be excluded from other major international organisations of which Spain is a member, such as the United Nations, International Monetary Fund, NATO and G-20. The report is unequivocal from a legal perspective regarding Catalonia’s lack of future EU membership, stating that its conclusions are “very simple in the light of law”.

Such sentiments have also been echoed by Luis Maria Linde, Spain’s central bank (Bank of Spain) governor and ECB board member. Linde has stated in no uncertain terms that Catalan lenders would be excluded from ECB funding upon the region gaining independence, which would have severe implications for its nascent economy. Linde asserted that independence would also bring Catalonia’s banking system to collapse, as the region’s lenders would “stop having access to the European Central Bank’s facilities”, severing ties between its financial system and the Eurozone and thus forcing Catalonia into imposing strict banking restrictions similar to those recently witnessed in Greece. Additionally, and somewhat controversially, Linde used the emotive Argentine term “corralitos”, referring to the possibility of “frozen bank accounts” should independence occur. Following a strongly worded response from Catalan President Artur Mas i Gavarró, an approximate 3-percent drop in Spanish stocks in the immediate aftermath of the comments, and a call for his resignation from several prestigious Catalan economists, however, Linde has toned down his remarks, admitting that an outcome of bank accounts being frozen is extremely remote.

Independence would have notable political and economic consequences, both for Catalonia and the wider region. Indeed, following the statement by the banking associations, financial markets responded markedly. Stocks of Catalan banks fell; Banco Sabadell, for example, lost 12 percent of its value between September 18 and 24, having stated it would have to “reconsider its implementation strategy” in the region. Barcelona-based Caixabank, the lender with the largest business in Spain and assets of €340 billion, 5,345 branches and more than 33,000 staff, lost more than 10 percent over the same period. Among the fears being cited by market analysts is the possible creation of a lose-lose situation, whereby strict capital controls are imposed on Catalonia, while Spain loses a significant and thriving portion of its economy.

Catalonia itself accounts for 16 percent of Spain’s population and 20 percent of its GDP, making it the top economic region in Spain and one with a higher level of economic output than Portugal in its entirety. Catalonia is also the most popular destination in Spain for inward foreign direct investment (FDI), accounting for 25 percent of the total number of foreign companies in the country. The public debt has been specifically cited as a major issue of contention by President Mas, who has suggested that the Spanish central bank should start considering the implications of an agreement not being met with regards to how this debt would be redistributed. It is estimated that Catalans pay $14 billion more in taxes to Madrid than they receive in government spending, and the Catalan government believes that it would be able to claw back 8 percent of its GDP if it didn’t have to admit its taxes to Madrid.

Up until such statements were made by Governor Linde and the banking associations, business leaders and top bankers were reticent about taking a firm position on independence, most likely to allay any resultant backlash and prevent unnecessary tensions from arising within the region. Since then, however, many pro-independence supporters in Catalonia have started to boycott domestic lenders by closing their accounts and transferring their funds to foreign banks. Many have expressed feeling threatened by recent public statements, which have been perceived as a measure to scare the Catalan people into voting against secession. The pro-independence organisation the Catalan National Assembly (ANC) has also reminded the central bank governor that the Bank of Spain has no authority over the liquidity of Catalan banks, but rather this is under the ECB’s direct supervision. Since the election, moreover, Banco Sabadell has stated that it sees no danger of having to leave its headquarters in Catalonia, a view that is in significant contrast to the statement it signed for the banking associations only 10 days earlier. Such a change in Sabadell’s viewpoint could be perceived as an attempt by the Catalan lender to appease its customers and reassure its employees and shareholders in the interim, especially given that the lack of voting majority in the election means that no unilateral declaration of independence is likely in the near future.

The likelihood of a wholesale exodus by Catalan lenders is by no means inevitable. Pro-independence activists argue that the issues related to the access of Catalan banks to the ECB and other European institutions could be easily solved. They are pointing to the fact that banks in non-Eurozone countries such as the UK, the US and Switzerland have full access to ECB credit, and indeed this access in recent years has been increased by the central bank—partially to mitigate the pressures arising from the Eurozone crisis—which would suggest that such credit is easier to obtain than many are suggesting. Because such banks have licenses to operate in at least one Eurozone member country, obtaining ECB liquidity is made easier; this in turn implies that the most pressing issue for Catalan lenders is that they retain their operating licenses within Eurozone member Spain, in the event of independence occurring. Furthermore, pro-independence politicians in the region have also recently been pointing to other small European states that are similar in size to Catalonia, and that currently house banks that have credit arrangements in place with the ECB, such as Kosovo and Vatican City. Again, this would imply that financing for banks in non-Eurozone countries might not be as difficult to obtain as is being posited by many.

Those in the pro-independence camp have also pointed to the referendum held by Scotland in 2014 as an example of the democratic process that they would like Catalonia to follow. While the “no” vote ended up winning in that instance, the overall process has given Scottish nationalists much greater political clout in London’s parliament. Were a referendum to be granted to Catalonia, however, it would likely trigger a push for greater autonomy in other regions, namely the Basque Country in the north of Spain. On the same day as Catalonia’s election, the Basque Nationalist Party held a rally in which the Basque head Inigo Urkullu expressed his desire for “a legal and negotiated consultation” on the region’s future status within Spain. Unlike Catalonia’s independence movement, however, the Basque Country’s quest for separatism has been a four-decades-long bloody campaign, which has killed hundreds. Although the armed Basque separatist group ETA declared an end to violence in 2011, they have refused to disarm. On the basis of security alone, therefore, the government might well be dissuaded from entertaining the possibility of a referendum being held for either region.

Thus far, much in the way of political rhetoric has surfaced from both pro- and anti-independence camps. The Spanish government continues to toe the line that the secessionists are operating outside of the law, given that there is no provision stipulated in Spain’s constitution for separation. The constitution, established during Spain’s transition to democracy in 1975 from the Franco regime, does not even allow for regional self-determination, suggesting that any serious degree of autonomy is going to be difficult for Catalonia to achieve without formal negotiation. Indeed, the banking associations’ joint statement has followed an extremely similar line to that taken by the government, urging that “the constitutional order and the membership of the Eurozone for all of Spain must be preserved at all times”, while also urging political leaders from both sides of the argument to discuss matters in order to achieve “better levels of well-being and social cohesion for all”. The election result, however, signifies that a strong political force is vying for complete secession from Spain, and even if the required majority was not ultimately attained, this force is one that Madrid can’t afford to ignore. It is expected that Junts pel Si will press ahead with a unilateral declaration of independence within 18 months unless a binding referendum is initiated by the central government during this period, despite the lack of a clear legal basis on which to proceed. The drafting of a Catalan constitution is expected to commence soon, and a foreign ministry, tax authority and central bank will also be established.

Deutsche Bank’s research team noted recently that the scenario is set to have complex legal and political implications, and expects the most reasonable outcome to be a compromise between central and Catalan governments, centred on an overhaul of the region’s financing arrangements. If such a result transpires, the Catalan banking system will be preserved, with full access to ECB funding remaining. Although seemingly unlikely at this juncture, should independence become a reality in the future, a dramatic transformation of Catalonia’s banking system could well be on the cards, especially with banks hoping to avoid the legal and economic quagmires in which they would be likely to find themselves. Given the overwhelming number of comments from those in power across Europe who all seem broadly aligned in their opinions on independence, it appears as though a grim reality is set to face any newly seceded state.

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