Spain Investors Told Catalans Offer Best Chance of Repayment

By Esteban Duarte and Ben Sills

Photographer: Josep Lago/AFP via Getty Images

Oriol Junqueras, leader of the separatist group Esquerra Republicana, has identified... Read More

Spanish bondholders would be well advised to engage with Catalan officials since they may hold the key to getting repaid, according to Oriol Junqueras, leader of the separatist group Esquerra Republicana.
Bond investors should recognize that Spain will struggle to contain its public debt when interest rates rise, and that the alternative to dealing with Catalonian separatists may be the anti-establishment Podemos party, said Junqueras. Podemos, which topped a national opinion poll this week, plans to audit Spanish government debt to assess how much is legitimate.
“We all suspect interest rates won’t stay low forever,” Junqueras, who heads the most popular group in Catalonia, said in an interview in Barcelona yesterday. “One good way to prepare for that would be to talk to Catalan politicians.”
Junqueras has identified Spain’s public debt of more
than 1 trillion euros ($1.3 trillion) as a weakness for the central government, as his alliance of separatists tries to force Prime Minister Mariano Rajoy to negotiate over Catalan independence. In the event of Catalonia leaving the Spanish state, he says the method used to estimate a split of assets and liabilities can significantly affect the bondholders’ recovery rate.
Spanish benchmark 10-year bond yields slipped two basis points to 2.12 percent as of 9:31 am in Madrid.

Independence Ballot

A flashpoint looms on Nov. 9, when Catalans including Junqueras propose holding an informal ballot on secession. They scaled back their plans last month after Rajoy rallied the Constitutional Court to block a non-binding referendum.
Even the goal of an informal consultation this weekend may be frustrated. Spain’s highest court is due to meet today to consider a second challenge to the Catalan plans by the central government. Catalonian President Artur Mas said last week he will push ahead with the ballot whatever the court says.
If independence is achieved, Catalans might draw on the precedent of the Dayton Accords relating to the former Yugoslavia and offer to take on 9 percent of Spain’s public debt, or about 90 billion euros, said Junqueras. That equates to Catalonia’s share of Spanish public spending over the past 25 years, he said.
“That’s a legitimate criteria,” said Junqueras. “We could propose that.”
Alternatively, the liabilities of the Spanish sovereign could be divided up based on Catalonia’s 21 percent contribution to the state’s tax revenue, he said. That would see the Catalans take on about 210 billion euros.

Better for Everyone

“It would be good for the markets to talk to Catalan society about this as soon as possible,” he said. “That would be better for everyone.”
The Spanish government regularly disputes Catalan claims about how much their region contributes and receives from the public purse.
Spain’s central government plans to pay 35.5 billion euros of debt interest payments in 2015 compared with 28 billion euros of contributions to social security and unemployment benefits, according to a presentation on the draft budget law available on the website of the prime minister’s office.

Largest Economy

Catalonia is home to 7.4 million people in the northeast corner of the Iberian peninsula and has the largest economy of Spain’s 17 autonomous regions, with annual output of 193 billion euros. That’s about the same as Finland or, indeed, Scotland, where voters in September opted to remain part of the U.K. in their own independence referendum negotiated with the government in London.
Gross domestic product per capita in Catalonia is 17 percent above the European Union average, whereas Spain’s as a whole is 5 percent below. Catalonia-based companies make up about 12 percent of Spain’s benchmark stock index, the Ibex.
With relations between Barcelona and Madrid deteriorating, Junqueras’s party is trading on its longer track record on separatism than Mas to gain support. Esquerra led Mas’s CiU by almost 8 percentage points in a regional government opinion poll on Oct. 31, up from 5 points in March.
As Rajoy refuses to even negotiate with the Catalans, Junqueras is pushing Mas to challenge the central government’s intransigence by setting up state institutions like a Catalan tax agency. Mas says he wants to pursue independence within the limits of Spanish law.
“If we don’t try to act like an independent state, we’ll never be able to negotiate as equals,” Junqueras said from his office in downtown Barcelona. “We will take advantage of any circumstance that can help us to gain independence.”