Fitch: Spain Rating Reflects Persistent Catalonia Tensions

Heightened tensions are likely to persist for a protracted period following the Catalonia regional government’s unilateral declaration of independence on Friday, 27 October 2017, but developments remain consistent with Fitch Ratings’ current one-notch adjustment to the Spain sovereign rating for risks of a disorderly resolution. As was widely expected, the national government intervened shortly after the declaration to dissolve the Catalonia parliament by triggering Article 155 of the Spanish constitution, assuming regional powers such as for policing and finance. At the same time, new regional elections were scheduled for 21 December.

How events will unfold is unclear, including precisely how the national government will apply its new powers, and the response of the regional administration and public. The initial signs are of broad acceptance of the process for new elections in December.

A further escalation of tensions that significantly worsens the outlook for the country’s economic growth and public finances could prompt negative action on our rating of Spain (BBB+/Positive). So far, the Spanish economy has maintained momentum, with provisional data indicating GDP grew 0.8% qoq in 3Q17, in line with our current full-year forecast of 3.1%.

We continue to view Catalonia’s secession from Spain as highly unlikely. The central scenario at our latest review in July was for a ratcheting-up of tensions between the central government and the Catalonia regional government following a Spanish constitutional court declaration that the planned referendum in Catalonia was illegal. The base case assumed broad political stability at the national government level, that Catalonia remains part of Spain, and that events around the Catalonia government’s call for independence do not significantly disrupt economic activity.

Our rating of Spain also incorporates a qualitative, one-notch downward adjustment to that implied by our Sovereign Rating Model to account for “downside political risks of a disorderly resolution of the Catalan government’s call for independence”. Events since our review in July remain consistent with that one-notch adjustment.

Our rating of Catalonia is BB/Rating Watch Negative. Resolution of the Rating Watch is dependent upon developments in the relationship between Catalonia and the central government, in particular how this affects liquidity support from the latter to the former.
Source: Fitch Ratings