As Spanish football giants F.C. Barcelona played their latest European Champions League game at home against Sparta Moscow, the 85,000 strong crowd in the stadium started singing for Catalan independence from Spain. Being Catalonia’s most famous sporting team, the mood at F.C. Barcelona’s home base was a sure sign of a brewing secession crisis.
True enough, a week after the game, the Catalan government announced a snap election that was effectively a proxy for a vote on independence. In a pointed statement, Catalonia’s president, Artur Mas, declared that “the hour has come to exercise our right to self-rule.”
Markets reacted unfavorable as Spain lurched from a fiscal crisis to a constitutional crisis. On Wednesday, Spanish ten year bond yields jumped the most in two months to reach a high of 6.04 percent and closed slightly down yesterday at 5.98 percent. Higher bond yields are detrimental to a government as it raises a country’s cost of borrowing. In fact, the seven percent figure is often seen by market commentators as an unsustainable level for sovereign bonds to be issued and Spain now runs the risk of getting closer to that ceiling.
Furthermore, borrowing costs have also risen in recent days as the creditor countries (Germany, Holland and Finland) are seen to be backtracking on their promise to loan Spain’s troubled banks €100 billion without adding to Spain’s sovereign debt load.
Spain’s looming secession crisis coupled with the troubled bank bailout has ended the summer rally that reached a peak with ECB’s bond buying announcement and the Federal Reserve’s QE3 exercise in September. The Spanish stock market’s IBEX 35 index fell 258.7 points (or 3.3%) since the week started to end at 7919.7 yesterday while the FTSE Eurofirst 300 index fell by slightly more than 1 percent since the start of trading on Wednesday. Closer to home, the S&P 500 was similarly affected as the index closed down 1 percent since Monday.
Written by SiHien Goh