Blood and bonds: Impact of a coupon on Spanish debt holders

These last few days two significant events have taken place, in the long saga of Catalonia's quest to recover independence, lost by force of arms in 1714. First of all, Spanish Economy Minister Luis De Guindos traveled to London and New York to hold talks with the world's top credit rating agencies, which after some initial reluctance have gradually come to understand that Catalonia is fighting to the end and that they should start thinking about the implications for their Spanish bond holdings. Second, a retired Spanish colonel revealed plans for a coup against the 11/9 referendum, nothing really new yet further confirmation that Spain is not a democracy. While both developments are in and by themselves significant and merit careful attention, we should not forget their strong connection. Catalans are ready to assume a fair share of Spain's national debt, this has already been made clear. However, should Spain resort to force, as soon as blood is spilled it is doubtful public opinion would support such a deal. Right now, Catalans wish Spain no ill, actually Catalan independence may benefit Spain in the long run by promoting Madrid's long road towards democracy, military professionalism, and rational economic policies. It may hurt at first, but once Madrid no longer needs to threaten Catalan voters perhaps her navy may lend a hand next time there is a typhoon in the Philippines. This means that international investors holding Spanish bonds should not be afraid of keeping their assets in the run up to the 11/9 referendum. There may even be good trading opportunities for well informed investors in the event of initial drops in their price.

However, all this could quickly change if Madrid chooses to use force. Once first blood is drawn, it would only be natural for Catalan public opinion to strongly oppose any debt split deal. After all, why should Catalans pay for the past follies of war criminals? We could well argue otherwise, but try telling that to the mother of a victim, killed simply because he wanted to vote.

If that happened, if public opinion made it impossible for Catalan authorities to take over a portion of Spain's national debt, international investors holding Spanish bonds would be in deep, deep trouble. With Spain's debt to GDP ratio shooting up to 125%, the country's already poor prestige damaged even further, and independent Catalonia sitting astride her main overland connections to the European Union, it would only be natural for international investors to hurry to reduce their exposure. Furthermore, if Madrid tried to turn the screws even tighter on Valencia and the Balearic Islands, in a desperate attempt to raise additional tax revenue, this may prompt stern opposition. So would pressing the Basque Country and Navarre to raise their net contributions to the Spanish treasury, currently limited to an amount bilaterally agreed every five years.

As a result, international credit rating agencies, the EU, the IMF, and the maritime democracies, would be well advised to strongly caution Madrid not to resort to force. British Prime Minister David Cameron has already done so publicly. No surprise here, his predecessor Margaret Thatcher was the only world leader to publicly condemn Spain's 1981 coup while its success was still hanging in the balance, while four decades earlier Winston Churchill had praised the people of Barcelona in the face of aerial bombings in an address to the House of Commons. Not all countries and international organizations are heir to Great Britain's centuries-old democratic traditions. They all have a stake, though, in the orderly split of Spain's national debt, safeguarding the interests of bond holders and the future of the euro. Now is thus the time for them to act, before it is too late.

Alex Calvo is an expert on Asian security and defence