Homage to Catalonia…

George Orwell (who was badly wounded in the Spanish Civil War fighting against the fascist insurrection led by Franco) must be spinning in his grave in light of the Catalan regional parliament’s declaration of independence for Catalonia (or rather Catalunya- one of 17 Spanish regional governments) as an “independent republic” (no more Spanish monarchy for Catalans!)

Not surprisingly, the Spanish government has subsequently exercised its own “nuclear option”; and invoked direct rule over what it sees as a recalcitrant province, led by fantasists bent on destroying the Spanish state (for if Catalonia goes, one can be fairly certain that the Basques at the least will aim to follow.) For avoidance of doubt, the action of the Catalan government is considered a criminal act by Spanish loyalists, as the constitution provides no mechanism for secession. The difference from the UK is that the Scottish referendum on independence was a negotiated process, not unilateral.

One only has to look at the recent history of Europe to be concerned about the potential consequences of the Catalans’ actions; especially since, even within Catalonia, it is considered arguable that there was no true majority in favour of independence and that what was characterized as a referendum was a “democratic coup”. Not surprisingly, no other sovereign state has recognized the “Catalan Republic” as a lawful sovereign entity.

It should be said that Awbury’s interest in these events is “academic”, in the sense that we have no direct or even indirect exposure. However, as we have written before, we are always looking for second or third order effects beyond the obvious.

Of course, it is far too early to predict how the relationship between Catalonia and Spain will evolve, but the legal consequences are already becoming evident, as large corporations move their legal domicile outside the “republic”.

One can also imagine that a frisson of concern is moving across the investor, trade credit and political risk markets. What happens if Catalans resist the central government, such that the rule of law breaks down, taxes go unpaid and uncollected, or an economic blockade is imposed? What if a local Buyer wishes to pay, but cannot because the local banking system is not functioning for “external” payments?

Taking the scenario further, what if Spain as entity begins to unravel, as the former Yugoslavia did some 25 years ago (without the bloodshed one sincerely hopes!)?

Under the conventions of international law, sovereign debt passes to successor states. Spain currently has approaching EUR 1TN of obligations. Apportioning that across a fragmented range of successor states would be a nightmare. It is somewhat ironic, that less than 5 years ago there were legitimate concerns about the ability of Spain to meet its obligations, as it suffered a wrenching recession, from which it has begun to recover; and now, when that concern should have been obviated, it may begin to return because of the political acts of a recalcitrant minority. Compounding the issue is that much of Spain’s sovereign debt is held by offshore investors, including the European Central Bank (ECB). While the risk of dissolution and default is still remote, the fact that the possibility now exists is telling, because a year ago it would have been considered laughable.

And bear in mind that Spain is not the only major European state with a separatist movement (leaving aside the UK). Italy has long had a north-south rift politically; and one can imagine that the Lega Nord is watching events in Catalonia and Spain with some interest.

The overarching point here is that risk can appear out of a “clear blue sky”, and that one has constantly to update one’s knowledge and understanding of the risk terrain and the possible ambush sites. The risk of Catalan secession was not an “unknown unknown”, but we are quite sure that it feels like an ambush to many.

The Awbury Team

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