Catalonia, Spain’s rich northeastern region officially asks for aid from the central government’s liquidity fund – yet another ball to the Spanish court.
This request, worth 5.023 billion, will weigh on the government’s efforts to balance its budget and could accelerate the move for asking for official help from its European peers. This in turn, will allow the ECB to begin buying bonds.
Catalonia hesitated quite a bit before making the move. Many locals in this rich, industrious region have felt that they are already subsidizing other Spanish regions for too long. Not all taxes paid to Madrid see their way back to Catalonia, to say the least.
The recent economic crisis has fueled the independence movements in the region, and support for an independent Catalan country even reached an absolute majority according to one poll.
However, the local government has been shut out of bond markets for too long and had no other option but to ask for aid. The Catalan government wants aid to be given without conditions, while it’s hard to believe that the central government will not impose any “conditionality” – exactly as it is requested to do when getting money from the European bailout funds and the ECB.
European Implications
So, negotiations between the Barcelona based Catalan government (Generalitat) and the central government could take time. Even if Spain grants the money with no questions asked, these 5 billion euros will have to be taken from the national budget. The deficit target is already going to be missed this year.
After Draghi opened the door for massive bond buying (even QE), Spain’s PM Rajoy hinted that this is possible. However, over three weeks have passed since then, and the Spanish government has been taking its time. This Catalan move could accelerate the negotiations and speed the formal aid request.
The central government holds meetings on Fridays. This Friday, August 31st, could see the request – it is the last meeting before the upcoming ECB meeting on September 6th. Nevertheless, it is important to remember that the ECB could wait for the decision of the German constitutional court on September 12th.
The calendar is becoming busy and solutions will have to be found. At the moment, the euro is still enjoying the optimism, but without real action, this optimism could turn into a downfall.
Will Rajoy say “I do”, ask for aid and accept more austerity?
Further reading: EURUSD forecast.
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