From Don Quijones at wolfstreet.com:
When Catalonia’s regional government announced a road map to independence from Spain in November last year, Madrid’s response was to threaten to cut off the financial supply lines to the region. It was the equivalent of a declaration of economic war, riddled with risks, especially with an acutely cash-strapped Catalonia facing over €4.6 billion of bond redemptions in 2016.
Madrid’s strategy was economic madness, as we warned at the time: Catalonia’s economy accounts for 20% of Spain’s GDP. And international investors would freak out if roughly one-fifth of Spain’s economy suddenly plunged into a deep recession or became ungovernable. Investors might question the ability of the Spanish government to service its over €1 trillion in debt.
Now, that scenario might be in the process of coming true.
The words “bankrupt” and “default” are being used with disconcerting frequency in relation to Catalonia. The words are even making their way into the headlines of national newspapers, as fears grow that the region could be on the verge of descending into a Greece-like debt spiral. According to Regional President Carles Puigdemont earlier in March, Catalonia already missed payments on at least two bank loans.
Fitch just warned that Catalonia has grave liquidity problems that will require “proactive management of the debt” and “close collaboration with the central state,” which is about as likely as bullfighting getting banned across Spain.
Standard &Poor’s downgraded Catalan long-term debt to B+ and its short-term debt to B, with a negative outlook, thus pushing it deeper into junk (emphasis added):
In the next 12 months the political tensions between Spain’s central government and the regional government could escalate, adversely affecting the financial relations between both.
(I)n our opinion, Catalonia’s management of its short-term risks represents a much greater risk than we had previously thought and we have serious doubts about the region’s ability to cope with the short-term liquidity pressures it faces.
Our rating also reflects Catalonia’s weak budget management and high level of indebtedness. We believe that its liquidity levels are inadequate, due to its limited capacity to generate liquidity, which is compensated by the support of the central government…
In our base scenario, we estimate that Catalonia’s internal capacity to generate cash will cover only 40% of the liquidity needs it will have over the next 12 months…”
On the bright side, so to speak, S&P declined to downgrade Catalonia’s rating to “selective default,” on the grounds that the banks have agreed to extend the maturities of the debt (for now) and Catalonia has continued to service the interest due on that debt.
To continue reading: Catalonia Nears Default, Threatens Spain’s Debt
