September 8, 2017 / 10:31 AM / 10 months ago

Fitch: Catalonia Referendum Move Likely to Increase Tensions

(The following statement was released by the rating agency) BARCELONA/LONDON, September 08 (Fitch) The passage of legislation by the Catalan regional parliament to facilitate a referendum on independence from Spain is likely to lead to greater tensions between the Autonomous Community of Catalonia and the Spanish central government, Fitch Ratings says. Relations with the central government are important to Catalonia's credit profile, as the region is highly dependent on central government liquidity support, but developments around the vote are largely in line with our assessment in July, when we affirmed Catalonia at 'BB' with a Negative Outlook. On Wednesday, the Catalan parliament passed the official decree law for the referendum, which the region's government plans for 1 October. This law was suspended the following day by the Spanish constitutional court. The central government has wide powers to intervene if it chooses to do so. Measures could include suspending some or all of the regional government's powers, or cutting funding if it were used to cover the cost of preparing for the referendum. We believe that the stance taken by both sides on the referendum, no matter whether or not it takes place or its outcome, could have a bearing on Catalonia's medium-term relationship with the central government. We consider separation from Spain to be unlikely, but an escalation in tensions would be rating negative for Catalonia if central government liquidity support were weakened or even withdrawn. Catalonia was removed from the 'BBB-' rating floor that we apply to Spanish autonomous communities in late 2015 because of its worsening relationship with the central government. However, liquidity support has continued to be forthcoming, notably through the Regional Liquidity Fund and also through advances from the Treasury. A key assumption when we affirmed Catalonia's rating in July was that the region would retain access to state support for debt servicing over the medium term and we believe this is still valid. We also noted that we would monitor political developments, in particular the possible referendum, and would take negative rating action if state liquidity support weakened as a result or there were a significant escalation in hostilities between the two governments that could compromise the region's debt-paying ability. The Negative Outlook on Catalonia's 'BB' rating reflects the risk of political confrontation that could result in the reduction or withdrawal of state support over the medium term, alongside Catalonia's weak (albeit improving) budgetary performance, high debt and refinancing risk. The region has reported negative current balances since 2008 and is the largest recipient of central government liquidity support. Total borrowing from the central government was more than EUR50 billion at end-2016, or about 80% of Catalonia's estimated direct debt. In our base case, we assume that increased tensions between the central government and Catalonia regional government in the lead-up to any vote do not result in significant disruption to the Spanish economy or government functioning. Ultimately, if there is a move towards further devolution with greater fiscal autonomy, this could be positive for Catalonia's credit profile if it improves fiscal revenues, in line with the region's strong economy and tax base, while central government support continues. We believe a normalisation of political relations with the central government would be a necessary first step. If this occurred, we could reinstate the rating floor for Catalonia. Contact: Guilhem Costes Senior Director, International Public Finance +34 93 323 8410 Fitch Ratings Espana S.A.U. Avenida Diagonal, 601 08028 Barcelona Patricio Novales Associate Director, International Public Finance +34 93 323 8417 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:; Pilar Perez, Barcelona, Tel: +34 93 323 8414, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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