International investors seek protection in case of Catalan independence

In mid-July, a high-ranking manager of a major US investment fund began a round of phone calls to his contacts in Spain. He wanted to know first-hand, and from a number of different sources, the possible effects that the rising political tension in Catalonia could have, as a result of the region’s drive for independence – in particular the chances that a referendum on a breakaway from Spain could actually be held. Since then, these phone calls have been more and more common, and international investors are starting to take action.

This is the case, for example, of large international real estate firms, who in recent times have been taking advantage of the generalized fall in prices in Spain to pick up assets at a considerable discount. “The contracts that are being signed in Catalonia include clauses that offer protection in the case of independence,” explains a fund manager from New York. “This is the same concept that was used in Greece, when there was a chance that the country would leave the euro.”

The political instability has become a determining factor in the analysis of Catalonia and Spain”

As a consequence of the economic and financial crisis, the Spanish banking sector has accumulated an enormous property portfolio, which it is offloading thanks to the application of deep discounts. In the last 18 months, foreign funds have carried out real estate operations worth billions of euros in Spain, and they don’t want to run the risk of ending up trapped with an asset that has scant liquidity in a region that could, potentially, leave the monetary union or even the European Union itself.

The referendum on independence in Scotland on September 18 put the Catalan question on the radar of international investors. “The Scottish referendum opened the door to the celebration of a number of votes on secession in Europe,” explains an international financial source. “A few months ago that was a minor risk for investors but now it is no longer a zero risk. The majority of investors doubt that the vote will take place on the announced date and still believe that a breakaway won’t take place, with some kind of negotiation happening instead. But the political instability has become a determining factor in the analysis of Catalonia and Spain.”

A week rarely goes by these days without an investment bank publishing a report on the consequences and associated risks of an independent Catalonia. In fact, ratings agency Fitch has just warned that Catalan public debt would be reclassified with a junk rating in the case of a breakaway.