Catalonia poll violence hikes Spain borrowing cost and hits euro
Spanish borrowing costs jumped yesterday as investors were unsettled by the violent police crackdown during an independence vote in Catalonia.
The country's government bond yields rose seven basis points to 1.69pc when trading began yesterday, their highest since mid-July, according to Tradeweb data, and outstripping a two basis point rise in benchmark German equivalents.
The gap between Spanish and German 10-year bond yields stretched to 121 bps, just below the 122 bps breached on September 26, which was the highest since June 12.
Spanish stocks slid and the euro declined as well, with more than 85pc of those who voted backing independence - defying the central government which deemed the ballot illegal.
"The sell-off makes sense, for today at least, given the headlines over the weekend and therefore perceptions of increased domestic political risk and uncertainty," said John Davies, a strategist at Standard Chartered in London.
"I suspect the market will need to see continued newsflow suggesting deteriorating political stability in Spain in order for government bonds to suffer sustained selling pressure."
While many analysts expect the crisis to be resolved with an offer of more autonomy, they said the uncertainty could have an impact on the country's economic growth and taint the reputation of Prime Minister Mariano Rajoy, who heads a minority government.
"This is probably the worst outcome for Madrid - there was violence but they didn't stop the vote either and public opinion in Catalonia is more polarised," said Federico Santi, an analyst at Eurasia Group in London, referring to reports of nearly 900 injured in the clashes with police. "It is clear that risks to government stability are increasing."
Analysts said one way forward would be to offer Catalonia greater financial autonomy, something that could weigh on national finances.
The London-based Centre for Economics and Business Research (CEBR) said the weekend scenes make Catalan independence "highly likely".
"This is bad news for the Spanish and European economies," said CEBR deputy chairman Douglas McWilliams.
"An independent Cataluña is set to be a prosperous part of Europe in principle with a high level of industrialisation and a sophisticated economy.
"How much this will change if Spain and the rest of the EU (presumably excluding the UK) decide to discriminate against the potential country is unclear but Spanish officials point to a potential fall in Catalan GDP of as much as 10pc.
"The experience of Brexit so far suggests that this fear might be exaggerated but investment in the region is clearly likely to be affected until the position clarifies."
Meanwhile, the National Treasury Management Agency (NTMA) is to issue a five-year syndicated bond tomorrow, with a target of between €3bn and €5bn. The money will be used to repay IMF loans early. The Government is seeking early repayment of €5.5bn of loans taken out as part of its 2010 international bailout, which will clear the remaining IMF debt.
In all, Ireland will repay €5.5bn in debt which will pay off €4.5bn to the IMF and will also cover the bilateral loans from both Sweden, (€0.6bn), and Denmark, (€0.4bn).(Additional reporting Reuters/Bloomberg)