Risky business

The markets aren't taking the prospect of Catalonian secession seriously. That is the conclusion we can draw from this week’s announcement by credit ratings agency DBRS that it is "very unlikely" it will change its rating for Spain if Catalans vote for independence in the October 1st referendum.

Currently, DBRS maintains an A(low) rating for Spain with a stable outlook, reflecting the country’s steady GDP expansion of the last few years. That this assessment is not going to alter on October 1st demonstrates the markets’ scepticism about how Catalonian independence could be achieved, even if a “yes” vote is returned in the referendum.

Among the “big three” ratings agencies - Standard & Poor’s, Moody’s and Fitch - there is consensus that Spain is now a fairly safe choice for investors; and although these companies haven’t yet announced how the Catalonian referendum will affect their assessments of the country as a whole, it’s unlikely their position will be that different from that of DBRS (for reasons explained below).

Standard & Poor’s currently rates Spain as BBB+ and upgraded its outlook from “stable” to “positive” at the end of May this year; Moody’s gives the country Baa2 with a “stable” outlook; and Fitch is running with a BBB+ and “stable”.

In making these assessments, the general strength of Spain’s economy and its banking sector is taken into account as well as the performance of specific asset classes such as its government bonds. But political risk is also factored in, so the positive agreement among the “big three” tells us that they see no threat posed to the Spanish economy by the planned Catalonian independence referendum. This is because it’s difficult to see how a split from Spain could be engineered, even if the region votes for secession on October 1st.

Indeed, it is still unclear whether or not the referendum will occur in the first place. Spanish prime minister Mariano Rajoy has repeatedly reminded scessionists in Catalonia that it would be unconstitutional - i.e. illegal - and that he will do everything in his power to stop it from happening.

But even if it does occur and pro-independence regional president Carles Puigdemont achieves his desired result, Catalonia would have to defy a formidable opponent in Madrid and act unilaterally to break from Spain. No wonder then, that, DBRS isn’t downgrading its economic assessment of Spain, or that the “big three” haven’t indicated that they will lower their ratings either.

DBRS’ statement, though, came with a crucial caveat: “If followed by …. a unilateral declaration of independence by Catalonia, [the referendum] could increase uncertainty about the Spanish rating,” it said.

With an aggressive Puigdemont talking of setting up a Catalonian army if a “yes” vote is returned next month, it might be that the markets start taking more notice of his cause in the weeks to come.