surinenglish

THE EURO ZONE

Time-out

The economic reaction to Catalonia's illegal independence referendum two weeks ago has been somewhat confused - a fact mainly owed to the general chaos and unpredictability unleashed on October 1st.

On Tuesday evening - much to the dismay of some of his more ardent followers - separatist Catalan president Carles Puigdemont called a time-out on secession proceedings: he wants to discuss his region's future with Spain's vehemently-nationalist prime minister Mariano Rajoy before going any further. Puigdemont's ruling coalition party, comprised of pro-secession “Together for Left” and the leftist CUP, signed a declaration of independence outside the Catalan parliament on the same day; but “Together for Left” was alone in signing another document suspending it.

The markets rallied as a result of the Catalan president's last-minute retreat from the brink. Spain's benchmark Index, the Ibex 35, climbed 1.5% on Wednesday morning, recovering some of the value it lost last week. By half past nine Spanish time on Wednesday, yields on Spanish 10-year government bonds had fallen 3.7 points to 1.6%, too. Both flutters suggest that the markets have returned - albeit briefly, perhaps - to their pre-referendum belief that Catalonian secession will not occur, no matter how intent Puigdemont is on pursuing it.

Yet for Catalonia's two biggest banks, the events of last couple of weeks have seen far too much hostility between Barcelona and Madrid, even if separatists have temporarily shelved their plans. Banco Sabadell, Spain's fifth largest lender, is moving its headquarters from Barcelona to Alicante and Caixabank, the country's third biggest, is relocating to Valencia. These apparently-hasty departures from Catalonia had long been in the pipeline for both banks, who saw their share prices plunge 6.3% and 6.8% respectively in the immediate aftermath of 0-1.

The Spanish government paved the way for these moves, by passing a law that enables banks to move their tax and legal bases out of Catalonia without holding shareholders' meetings. In other words, it created a piece of legislation that allows for rapid relocations in the face of perceived instability in the region. That it did so is hardly surprising, because Rajoy is intent on undermining Catalonia's attempts to establish itself as a fully-functioning republic.

Despite Puigdemont's indication that he wants to open a dialogue with Madrid, a solution to the febrile issue of his region's independence remains as elusive as ever. Spanish economy minister Luis de Guindos said this week that there can be no talks with the separatists until the rule of law is established in Spain, which would basically require Puigdemont to concede the referendum's invalidity. Given that Madrid will be waiting an awfully long time for such an admission, it might be better to start the talks anyway. After all, rational discussion about what to do next is the best way for both sides of this standoff to regain their lost credibility.