Political tensions simmer in EU as Fitch warns on Catalan independence

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Political tensions in the European Union continue to simmer as Fitch Ratings warns on tensions in Spain from the Catalan regional parliament’s passage of legislation this week to run an independence referendum.

The rating agency responded today saying it is prepared to take negative rating action if state liquidity support from the central government weakened as a result or there was a significant escalation in hostilities.

Investors watching Europe at the start of the year were braced for political upsets, but Emmanuel Macron trounced Marine Le Pen in the French elections, while anti-EU politicians failed to gain ground in the Austrian and Dutch elections.

Eurozone equities enjoyed a surge in popularity as risks abated.

The Catalan independence referendum would take place on 1 October. Despite the court decision Catalonia has previously held illegal referendums with a 2014 poll on self determinism attracting 95 per cent support for further devolution from a total turnout of 2.3m voters.

Catalonia currently has a BB rating with a negative outlook.

SYZ Asset Management co-head of multi asset Hartwig Kos says the referendum could provide opportunities in fixed income.

“We might see some volatility coming out of Spain in the near term. You’ve seen Spanish bonds underperforming their other European peers. Last time around people ignored it more or less, now people are a bit more concerned.

“I think it will all wash out and it will be more noise than anything else, but you will see a bit of volatility there and there might be opportunities in some of the segments of the bond market.”

The regional government’s referendum legislation passed on Wednesday, but was immediately overturned by the Spanish constitutional court.

Catalonia’s weak budgetary performance, high debt and refinancing risk added to the BB rating, despite an investment grade floor rating for Spanish autonomous communities.

However, Fitch says further devolution for the region could be credit positive for Catalonia if it improves fiscal revenues, in line with the region’s strong economy and tax base, while central government support continues.

It says it would reinstate the rating floor for Catalonia if political relations with the central government normalise.

The proposed referendum would take place one week after the German national elections, which are expected to deliver Angela Merkel a fourth term. The Italian general election is due to take place in the first half of 2018.