Catalonia Crisis Hits Banks, Stock Markets

Big banks threatened Thursday to abandon Catalonia over vows by regional leaders to break away from Spain after the national government rejected calls for mediation in the volatile standoff.

Sabadell, the Barcelona-based bank, said it will move its legal base out of Catalonia following threats by the region's leaders to declare independence. Spain's fifth-biggest bank said it would start the process on Friday to move its legal domicile to Alicante. Its headquarters and employees will remain in Barcelona, news outlets reported.

The board of CaixaBank will meet on Friday to consider a similar move. Caixa is Spain's third-largest bank and accounts for about half of Catalonia's banking sector.

Sabadell said: "Banco Sabadell has adopted this decision in order to protect the interests of our customers, shareholders and employees." It went on to say it wanted to operate "under the supervision of the European Central Bank and the regulations of the European Banking Authority", something that would be removed were Catalonia to declare independence.

The European Union has said it will not recognize an independent Catalonia, which would mean the region would not be subject to EU rules nor protection.

European Commission Vice President Frans Timmermans on Wednesday defended Madrid’s right to “the proportionate use of force” to keep the peace. But he said it was “time to talk, finding a way out of the impasse”.

Reports said the Spanish government will issue a decree on Friday making it easier for companies to move their legal base out of Catalonia. Such a move could hit the region's finances as it considers declaring independence, possibly as soon as Monday, BBC reported.

The decree would allow CaixaBank to transfer its legal and tax base without needing to hold a shareholders' meeting as stated in its statutes. The Spanish government and Caixa both declined to comment.

Catalonia accounts for a fifth of Spain's economy, with factories for companies including Volkswagen and Nestle as well as Europe's fastest-growing sea port of Barcelona.

Volkswagen briefly stopped production on one line at its Seat plant in Catalonia when protests disrupted parts supply. Stoppages also affected production at Nestle's instant coffee plant in Girona.

Spain's constitutional court has suspended next Monday's session of the Catalan parliament, in a bid to pre-empt a possible push for independence.

If Catalan regional president Carles Puigdemont follows through on his threat to declare independence next week, Spain could respond by suspending Catalonia’s existing autonomous status and imposing direct rule from Madrid.

Markets ‘Worst Since Brexit’

Shares in Sabadell, the second-biggest bank in Catalonia and the fifth largest in Spain, have fallen 10% this week as the political crisis between Catalonia and Madrid deepened. They closed more than 6% higher on Thursday, while Caixa shares added almost 5%.

Sabadell bought TSB, the bank formerly owned by Lloyds, for £1.7 billion in 2015.

Spain’s key IBEX 35 stock index rebounded Thursday from sharp losses the previous day, as the Spanish government moved to block a move by Catalonia to declare independence crisis.

Leading daily El Pais headlined that the stock market drop was “the worst since Brexit” was approved in a June 2016 referendum.

Downgrade Warning

Fitch on Thursday warned it may downgrade the sovereign debt rating of Catalonia, a day after fellow ratings agency Standard & Poor’s issued a similar report as tensions with Madrid escalate over the region’s push for independence.

Fitch said that the political tensions between the central government and Catalonia “are likely to worsen over the short term. “This may lead to unforeseeable events, including a potential disruption of the state liquidity funds to Catalonia,” the ratings agency added.

Late Wednesday S&P Global Ratings placed its ratings for Catalonia “on CreditWatch with negative implications” saying that “the Catalan government’s political confrontation with Spain’s central government has escalated” following the banned referendum in Catalonia on October 1 on the region’s independence.

“We see a risk that this escalation may damage the coordination and communication between the two governments, which is essential to Catalonia’s ability to service its debt on time and in full,” the S&P statement continued.

As a result, S&P said it would place Catalonia’s ratings—currently “B+/B”—“on CreditWatch with negative implications”. The agency also said it expected to “resolve the CreditWatch within the next three months”.

Fitch put Catalonia on a ‘rating watch negative’ footing, meaning it could downgrade from its current BB level, which is already in the “speculative” or junk territory.