Spain is taking the radical step of triggering Article 155 of the constitution for the first time in its 40-year history after Catalonia’s president, Carles Puigdemont, threatened a formal declaration of independence on Thursday.
The central government in Madrid had imposed a deadline of Thursday for Catalonia to decide whether it would declare independence. Reference to Article 155 of Spain’s constitution is where a self-governing community is obliged to fulfill its obligations to the state or risk the government taking its powers away.
Just before the 10am deadline, Puigdemont delivered a letter that outlined that should Madrid continue to repress the region and not enter into dialogue then the Catalan parliament would meet to vote on a formal declaration of independence.
But is brinkmanship leading to shaky markets?
The impact from the crisis is already causing some reverberations as Spain has had to cut its growth forecast for 2018 to 2.3% from a previously projected 2.6%.
The cut in growth according to the economy ministry was down to both slow global growth and lower consumer spending.
Spain’s constitutional crisis, triggered by Catalonia’s push for independence, is an “alarm call for global investors” according to deVere Group, an independent financial services organisation.
There hasn’t been any significant rocking of the boat and the markets remain mostly sanguine. On Thursday morning, bonds and stocks opened moderately lower.
The 10-year benchmark Spanish bond yield rose 3 basis points to 1.62%, while the Ibex 35, Spain’s stock index, slipped 0.8%.
Potential to destabilise the Eurozone
However, market commentators warn that the growing crisis can have a significant destabilising effect not only on Spain but also the wider Eurozone and on the euro.
Expectations are that the Catalonia independence crisis could push Spain’s recent economic progress back. This would inevitably weaken the wider eurozone’s economic stability by pushing the bloc into another era of grinding uncertainty.
Experts take the view that while macro-economically markets are in good shape there are still a number of potential triggers in the short term that could cause turbulence in both the domestic and regional financial market.
The ongoing uncertainty for investors means, says deVere CEO, Nigel Green: “In the longer term, if Catalonia splits, Spain’s economy – Europe’s fourth largest – could lose 20 per cent of its revenue. Plus the process could adversely affect investment into both Spain and Catalonia.”
Other triggers in play
The Catalan crisis is playing out against a backdrop of other equally isolated potential triggers to the market and only hindsight will provide 20/20 vision. However, the bond and equity markets in Spain are currently weakening.
Harry Colvin, director and senior marketing strategist at Longview Economics said: "We have a number of signals from proprietary trading tools that suggest complacency is high.
"Typically those signals precede significant pullbacks of between 5-10% in the S&P 500. In that respect, markets are primed for weakness over a one- to two-month period. The underlying macro backdrop though, is in good shape."
Colvin notes there are a number of triggers, one of which is quite possibly Spain but it's quite an isolated and contained situation, but it could just as easily be negative news flow related to North Korea, US tax reform or potentially the heightened risk of a hawk leading the Federal Reserve.