JPMorgan advised its clients to reduce their exposure to Spanish government debt. Although the bank does not foresee Catalonia achieving independence, it believes that developments in the region could lead to a resurgence in Spain’s risk premium.
In the last five weeks the premium (the cost differential of Spain’s 10-year bonds vis-á-vis Germany’s) has increased from 101 to 121 basis points. It’s still not much compared to the 630 points that it reached at the height of the Euro Debt Crisis in 2012, but it’s enough to get analysts on Wall Street and in the City of London to sit up and pay attention.
Economists in London at Bank of America Merrill Lynch warn of two possible scenarios.
“First, although it is not our central scenario, if we saw a great amount of [social] discontent, markets could react more than they have until now. Nothing has happened yet, but there have been several very tense situations.”
For example, last Wednesday when Spain’s Civil Guard raided Catalan government buildings and arrested senior government officials, which sparked a flurry of spontaneous protests outside Catalan government buildings. The elected government of Catalonia, backed by an overwhelming majority of Catalans, is determined to proceed with a referendum that has been prohibited by Spain’s supreme court.
Spain’s National Court is now investigating people who protested last Wednesday outside Catalan government buildings for crimes of sedition, which are punishable with prison sentences of up to 15 years.
Spain’s knee-jerk response was to dispatch cruise ships to Barcelona filled with police reinforcements drafted from other parts of the country. Cries of “Viva España” (Long live Spain) and “Á por ellos!” (Go get them!) accompanied them as they left their barracks.