A new battle for Rajoy

The conservative prime minister is already fighting on several fronts Now he faces an unprecedented crisis as his former ally in Catalonia sticks the knife in

Prime Minister Rajoy (front right) passes by Catalonia's regional premier Artur Mas (c).
Prime Minister Rajoy (front right) passes by Catalonia's regional premier Artur Mas (c).Emilio Naranjo (EFE)

The mood was grim in Congress last Wednesday morning. Deputies had woken up to extensive media coverage of police baton-charging protesters outside the building, and had to make their way into work through barricades still in place. The stock exchange had slumped the day before, the price of borrowing continued to rise, and on top of that, they were still coming to terms with the implications of the announcement days before by Catalan premier Artur Mas that he was going to hold a referendum on independence for the region.

A government minister was overheard speaking his mind to a deputy from Mas' CiU grouping: "Mas has lost it. You people are putting the financial stability of Spain at risk. The same day that you announce the referendum on self-rule, you ask the central government for five billion euros, telling us that this is your money anyway. Don't you people understand that the regional government's bonds have junk status right now? Can't you see that the only reason you'll get your money is because Spain still has a very limited margin to finance itself, and that we will have to resort to lotteries to get further into debt?" The Catalan deputy listens patiently, and then replies: "Nobody has lost their mind. You people have to understand what is going on in Catalonia and start talking to us."

Shortly before this frank exchange of views, while Prime Minister Mariano Rajoy was attending the UN General Assembly in New York, the deputy PM, Soraya Sáenz de Santamaría, met with veteran CiU deputy Josep Sánchez Llibre, the man traditionally tasked with leading talks with the central government, and a man with close ties to Catalonia's business community. Sáenz de Santamaría was looking for a way to bring Mas round. Sánchez Llibre, who does not back independence, outlined the situation in Catalonia, and suggested that the government make some kind of effort to meet the demands of the region, perhaps following the Socialist Party's lead with proposals about a move toward federalism.

An independent Catalan nation would be born bankrupt


The specter of Catalan independence could not have stirred at a worse time for Prime Minister Mariano Rajoy, this time being prompted by the eternal argument over how much the region contributes in taxes to the central government, and how much it receives in return in terms of services rendered. Catalan regional premier Artur Mas, once an ally of Mariano Rajoy, has called early elections, and depending on their outcome, a referendum on independence. The belief among many in Catalonia is that the region's economy would emerge from recession more quickly if it were freed from the shackles of Spain.

This might have been true in 2005, and it may again be so in, say, 15 years' time. But right now, the international markets have classified Catalan regional government bonds as junk; it cannot raise money on the international markets; investors are staying away; and it has had to ask the central government for money to pay its debts.

The majority of financial experts and analysts agree that independence is not a viable option for the moment.

If Catalonia became independent overnight, it would wake up bankrupt. Its fiscal deficit is equivalent to eight percent of GDP.

Right now, Catalonia is the third-most-indebted region in Spain. Based on its population, 16 percent of the national total, and its share of national GDP, at 18 percent, it would take on around 100 billion euros of Spain's total public debt of 617.7 billion euros.

To that figure should be added five billion euros owed by its town halls, along with a few more billion as its proportion of the 34-billion-euro debt owed by public companies such as rail firm RENFE, and so on. In total, a hypothetical new state would start off its life with accumulated debts of around 150 billion euros.

"Catalonia would not have the resources to pay its debts for at least two years, and would go bankrupt, unless it were able to get a bailout, which would be difficult," says Professor Juan José Rubio, a former head of the Institute of Fiscal Studies.

Josep Oliver of the Autónoma University of Barcelona says that the region's debt would amount to 80 percent of GDP at present, but sees self-rule as viable in the longer term: "Independence right now is unimaginable. But in a few years it could be done. What's more, as an independent state its ability to generate resources would improve, which would make it easier for it to get money on the international markets."

Xavier Cuadras, who, along with Modest Guinjoan, is the author of a new study on the economic viability of an independent Catalonia, argues that the region's debt would put off investors from lending to the Catalan government. But he says that there are other options for raising money, such as issuing bonds or borrowing from the banks.

"But that would require some very astute political management," he says.

José Carlos Díez, the chief economist at consultancy Intermoney, highlights the problems facing the region's banks in separating from the rest of Spain. Only two Catalan banks remain solvent - Sabadell and La Caixa - but they are dependent on money deposited by customers throughout the rest of Spain.

"If Catalonia became an independent state, huge numbers of Spaniards would close their accounts and switch their mortgage to banks in Spain itself. If a company loses 30 percent of its customers, it loses money. But if a bank loses 30 percent of its customers it folds," Díez points out.

Catalonia's foreign debt has never been calculated, but it would inflate rapidly. Díez notes that this would mean bankruptcy, which in turn would wipe out businesses on a massive scale.

"Seven years ago, independence would have been bad for Spain, and it would have been difficult for Catalonia, but doable. Right now, in economic terms, it is out of the question," he says.

Struggling with a worsening economic crisis and the near-certainty of having to ask the EU for a bailout, the government is now having to deal with an unprecedented political crisis in Catalonia. In public the government is talking tough: "There are mechanisms to prevent a referendum on independence, and a government prepared to use them," Rajoy said on Saturday. But in private, Rajoy is worried.

Ministers have watched in dismay as Mas, once the government's chosen ally in implementing austerity measures, has ratcheted up the tension in recent months. To begin with, many dismissed his calls for independence as a bluff, but he has wrong-footed the government, which has shown itself unable or unwilling to talk to CiU. Rajoy has no intention of visiting Mas on his home turf, instead hoping that he can establish a dialogue with the region's business leaders to put pressure on Mas. He may have taken some consolation from the comments on Friday by Manuel Lara, head of Spain's largest publishing group, Planeta, who said: "If Catalonia went independent, we would move to Zaragoza, Madrid, or Cuenca." But having called early elections in the region for next spring, the government also knows that Mas is paying more attention to the electorate than business leaders.

The government's only hope is that CiU fails to win an absolute majority, or that if it does, pressure within the party from those opposed to independence prevents him from going ahead with the referendum, instead preferring to use its strong position to negotiate more favorable financial conditions with Madrid.

The government is concerned at the message this is sending to the international financial markets, and that it will have to accept the de facto takeover of economic policy by the troika of the European Commission, the IMF and the European Central Bank if it asks for a bailout. The government's economic team is hoping that its evaluation of the state of the country's banks, along with further austerity measures, will keep the wolf from the door for the moment.

Meanwhile, Rajoy is also under mounting pressure from the leaders of the country's regions, the majority of whom are from his own party. Having accepted cuts to their budgets from Madrid, they are not about to accept Catalonia wringing any concessions out of the central government. And then there is the upcoming election in PP-controlled Galicia, the results of which will be interpreted as a referendum on the government's performance so far.

With little hope of a political victory in Catalonia, Rajoy is focusing all his energy on securing a convincing win in Galicia, as he did in 2009, when he was also under pressure. The recent corruption scandal involving the Socialist Party mayor of the Galician city of Ourense has given the prime minister some grounds for hope of retaining this traditional PP fiefdom.

Regardless of the outcome of the Galician elections, there is growing concern among the PP rank and file that the government is failing to maintain the political initiative. They may not accept Socialist Party leader Alfredo Pérez Rubalcaba's recent assertion that "the country is slipping away from him," but many in the party are worried at Rajoy's refusal to appear before Congress and to show the country that he is aware of what is going on and more importantly that he is taking measures to deal with the situation, whether in Catalonia, Brussels or Madrid.

Some veterans in the PP already fear that Rajoy cannot maintain the fight on so many fronts. "Couldn't somebody have done something to prevent Mas taking advantage of the king's visit to Barcelona last month at the same time as he was stirring up talk of an independence referendum?" one party veteran demanded a few days ago. In short, they would like to see Rajoy out on the stump, politicking, showing that he is in touch with people. Sources from Rajoy's inner circle say that he has his own way of doing things, and that he is focused on the single task of getting through the economic crisis.

Catalonia's independence bid drums up little international support

EL PAÍS, Madrid

The resolution passed in the Catalan regional parliament last week backing a referendum on independence was not just about relations between Catalonia and the rest of Spain. The bill also calls on the regional government and the parliament to support the process "through dialogue with the international community and the European Union."

For regional premier Artur Mas and his pro-independence supporters, international support for self-rule is essential. For the moment, though, he has largely failed in this regard, and the region's neighbors in Europe, as well as in Latin America, seem far more concerned with Spain as a whole overcoming its current economic woes.

In Germany, which holds the key to Spain's recovery, the government of Angela Merkel describes Catalan independence initiatives as "an internal matter." Sources close to the chancellor say that nobody in her inner circle believes that Spain breaking up is the solution to anybody's problems. The same sources say that Berlin has no direct contact with any of Spain's regional leaders, and that it just talks to the central government. They add that Berlin's only concern is that Spain should continue to implement austerity measures and to cut back on public spending.

One country that is keeping an eye on the Catalan independence issue is the United Kingdom. The Scottish government, led by pro-independence Alex Salmond, has announced that it will be organizing a referendum on independence there in 2014. The government of David Cameron has had little option but to accept the initiative, insisting only that it be held as soon as possible and according to rules imposed by Westminster. But while the British media has given ample coverage to the issue of Catalan independence, describing it as a historic problem that has been exacerbated by the depression, neither Edinburgh nor London have made any official comment on the question. "This is a matter for the Spanish government. We have nothing to say about it," was all that a spokesman at the Foreign Office would say.

"It is not our policy to comment on internal matters and we prefer not to discuss the Catalan question," echoed Salmond.

In Italy, a country where regionalism is alive and well 150 years after unification, the government also prefers not to discuss the question of Catalan independence. "It is better not to discuss the problems that a country might face at some point in the future. We have enough on our plate at the moment," said a spokesman. Nevertheless, Italians are watching events in Spain with a mixture of surprise and relief. Surprise because until recently Spain was seen as a country that had managed to overcome in record time the issues of the past, in many ways overtaking Italy. Relief because the political turmoil in Spain has taken the spotlight off Italy. Last week Italian newspapers ran headlines reading: "Spain breaks up due to the indignant and separatists. Rajoy looks around him and sees only disaster."

Artur Mas' plans for self-rule in Catalonia have been followed by the media in Latin America, albeit to a lesser extent than in Europe. In Mexico, which until recently saw Spain as a bastion of prosperity and order, the protests outside the Congress in Madrid last week took precedence over the march in Barcelona in favor of independence the week before. Historian Enrique Krauze warned in a newspaper article: "The nationalists will lead Catalonia to isolation and cultural impoverishment. Independence would be deadly for Catalonia." Writer Héctor Aguilar Camín said: "Independence would only add to Catalonia's existing problems by creating political uncertainty."

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