Catalonia is no repeat of the European crisis

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A woman walks wrapped in a Catalan pro-independence flag. AFP

LONDON (Reuters) – Even though Catalonia’s bid for independence may be Spain’s worst political crisis in decades, it has been no Grexit, Brexit or even Frexit for foreign investors.

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Overseas holders of Spanish stocks and bonds – and indeed owners of euro zone assets in general – have been quick to dismiss comparisons with a succession of rolling sovereign debt crises that hit the euro zone between 2010 and 2012.

Even though Spain’s wealthiest region has a bigger economy than Greece, Portugal and Finland, relatively unfazed Spanish and Catalonian assets to date shows markets are treating the crisis over Catalonia as a largely domestic issue with few if any systemic sovereign, banking or euro wide threats.

While Spain’s blue-chip IBEX equity index is about 7 percent off the year’s highs, it is still up more than 10 percent for 2017 as a whole. The Spanish government’s 10-year borrowing costs as well as their risk premium over German equivalents are lower than where they started the year. The euro exchange rate has barely budged.

On one level the scale of financial risk more than gross domestic output of the area is of a different order.

Catalonia’s debt level – at around 77 billion euros – is around quarter that of Greece.

In addition, 52.5 billion euros of that – just over two-thirds – is owed to Spain, a further 8.175 billion euros to resident financial institutions, 6.018 billion euros to the rest of the world and 10.035 billion euros to others, according to the data from the Spanish central bank.

The international exposure is too small to create ripples across the euro zone even in the event of a Catalonian default, and the effect on Spain would also be limited. Catalonia’s total debt to the centre represents just 4.75 percent of the Spain’s total debt as of the end of 2016.

Independence on its own would neither lead to a sovereign default nor to an exit of an existing euro zone member.

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