The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Spain’s Dilemma (Continued)

Some month ago we commented on Catalonia’s attempt to secede. Here is an update.

Spain’s debt has soared since the 2008 global crisis. It has now broken out above 100% of GDP. It’s largest province, economically, is Catalonia. Barcelona is the major city of Catalonia. It is in a worse debt situation than its mother country of Spain.

There has been a strong independence movement for many decades, with terrorism, executions by garrote, etc. Surveys show that about 80% of Catalonia’s businesses and people want independence. They want a referendum this fall, but Spain’s central government is vehemently opposed. Now comes the extortion.

Spain’s deficit is already one of the largest in Europe. And all of Catalonia’s debt is in the name of the King of Spain. If Catalonia gets independence, that debt may become worthless and throw Spain’s debt rating to junk status. As analyst Don Quijones points out, Spain’s debt to GDP ratio would soar to 125% because about 30% of Spain GDP comes from Catalonia. The plunge in Spain’s bond market would have some disastrous consequences, including for Spain’s banking system.

The U.S. rating agency Moody’s has already said that any default on Catalonia’s debt would be interpreted by the markets as a Spanish default.

Once again the lender of last resort would be the ECB (European Central Bank) in order to save the EU and the EMU. And Germany is one of the few viable significant countries in the EU. Germans would bear the burden. Well, they may not mind, because they love to go to Spain on vacation. Perhaps they can get some free Sangria on their next trip, or some great Spanish wines. How about vouchers for the nice Melia hotels?

Spain is another example of how a wonderful country, with hard-working people, are overwhelmed by extreme corruption in all parts of the government. Governmental corruption is like rust is to iron. It’s extremely corrosive and destructive. Would Catalonia would be better off as an independent country? Only if corruption is wiped out.  And that won’t happen.

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