Debt-stricken Spain faces a political crisis after the leader of Catalonia, the biggest region, called early elections. This could hasten the region’s split from the rest of Spain, as the election is likely to be an unofficial referendum on independence.
Madrid’s refusal last week to grant Catalonia more fiscal autonomy has triggered a surge of separatist sentiment. Meanwhile, investors are still wondering when Madrid will officially ask Europe for a rescue package. An independent review of the banking sector will provide an estimate of how much it will cost to recapitalise it.
What the commentators said
Spain’s politics are much more unstable than people realise, as Tony Barber pointed out in the Financial Times. Since the advent of democracy in the late 1970s, “the legal and political balance of power between Madrid and the regions has been in an almost permanent state of renegotiation”.
The Catalans have always considered themselves “different from the rest of Spain”, added Ben Vickers on Bloomberg.com. The Catalan government “sees the dissatisfaction with Madrid’s handling of the crisis as an opportunity”. They hope it will give regionalism enough of a boost for them to prise more autonomy out of the central government.
The prime minister, Mariano Rajoy, now faces an unenviable choice. “He either refuses Catalan demands for more autonomy and risks enflaming Catalan nationalist sentiment, or agrees to increased autonomy and risks enflaming Spanish nationalist sentiment.”
Spain’s spendthrift regions have always made it hard to keep the overall budget deficit under control, and political turmoil will further dent confidence in Madrid’s ability to keep a lid on regional spending. Banking jitters also look likely to endure, said George Hay on Breakingviews.
Spain seems set to use just over half of the €100bn rescue fund for Spanish banks that has been made available by the eurozone. Yet this appears to be based on optimistic assumptions about banks’ likely eventual losses. “If investors now take yet another Spanish bail-out with a pinch of salt, it will make it harder for Spain to turn the corner.”
Endless rounds of austerity, meanwhile, have only hurt the economy even more, making it ever harder to get debt under control. Given the deteriorating outlook, Spain should not wait too long before officially requesting a full bail-out, said Capital Economics. If the markets think it will try to avoid using European funds, bond yields will shoot back up and Spain will find itself “in a much weaker bargaining position” when it comes to hammering out the terms of the rescue.
Add the Catalan situation to the “debt-deflation disaster”, concluded Ambrose Evans-Pritchard on Telegraph.co.uk, and we are moving from the financial phase of this crisis to the “full-blown political phase”. The European crisis “really is playing out like the 1930s”.