September 25, 2012 7:29 pm

Secession crisis heaps pain on Spain

Spain protest©AP

Spain lurched further towards a full-blown constitutional crisis as Catalonia announced a snap election potentially opening the way for the country’s most economically important region to declare independence from Madrid.

As police in the Spanish capital barricaded the Spanish parliament against anti-austerity protestors, the government of Mariano Rajoy vowed to stand firm against a drive by Catalonia for secession as the Spanish leader faces the most critical period of his premiership.

“The hour has come to exercise our right to self rule,” said Artur Mas, Catalonia’s president. He called the vote, which is likely to be cast as a proxy referendum on Catalan independence, after Mr Rajoy last week rejected his demands for greater fiscal autonomy, triggering a wave of nationalist sentiment in the northern region.

The political turmoil within Spain came amid signs that a German-led group of eurozone countries were attempting to roll back an agreement reached in June that would free Spain of tens of billions of euros in bank bailout debt.

Under the June deal, Spain’s €100bn bank bailout would be shouldered by the new €500bn eurozone rescue fund, the European Stability Mechanism, rather than the Spanish government.

On paper the ESM will not be given legal powers to take over the bank bailouts entirely until the eurozone politicians have agreed to a federal banking supervision system. But according to senior officials Spain has promised that its bailout will be covered even though it is scheduled to begin in November well before a final agreement.

However, after a meeting between the German, Dutch and Finnish finance ministers on Tuesday, the three said the ESM would not be allowed to take over “legacy assets” recapitalised before the banking supervision system was in place. This calls into question the markets’ assumption that Spain’s bailout and any assets put in the soon-to-be-created Spanish “bad bank” will be covered by the deal.

As Madrid faces increasing pressure from markets to request a European bailout, the Rajoy government, which will announce Spain’s budget for next year on Thursday, was also dealt a blow by data that showed it is likely to miss budget deficit targets agreed with Brussels for this year.

Meanwhile, Andalucía, Spain’s most populous region, signalled it would apply for a €4.9bn central government bailout, following Catalonia and Valencia as the country’s autonomous regions struggle to pay for public services and refinance their debts.

Catalonia, which represents about a fifth of Spain’s gross domestic product, is the country’s most indebted region, and has been forced to embark on a swingeing austerity programme and request a €5bn credit line from the central government to cover its debt maturities.

Two weeks ago, at least 600,000 pro-independence demonstrators marched in Barcelona, with polls suggesting support among Catalans for splitting from Spain has grown considerably since the crisis began.

Mr Mas said the Catalan vote, called nearly two years ahead of time for November 25, was needed as any referendum on independence organised without a fresh mandate would be “a fraud”. Earlier Soraya Sáenz de Santamaría, Spain’s deputy prime minister, criticised him for “adding a crisis to the crisis”.

Mr Rajoy, who won an absolute majority in elections last November, has seen his popularity slump as Spaniards become discontented with repeated rounds of cuts to public sector wages, and other austerity measures.

Maria Luisa Lopez, 48, a civil servant from Ciudad Real said she was protesting outside Spain’s parliament on Tuesday “out of indignation, for social justice and for the freedom of this country”. “The politicians continue to get high salaries, and workers continue to get theirs slashed,” she said.

While Mr Rajoy has sworn he will not touch the Spanish pension system, he is expected to announce a new round of tax measures to help Spain meet its budget deficit reduction targets for this year. Many economists now argue this will be very difficult to achieve without further measures.

Data released on Tuesday ahead of the budget announcement indicated Spain was heading towards missing its overall target of cutting its budget deficit to 6.3 per cent of gross domestic product for this year.

Spain’s central government budget deficit from January to August came to 4.77 per cent of GDP, higher than a full-year target for the central state of 4.5 per cent. The budget ministry said that once exceptional items, including early transfers of money to regional government, were stripped out, the figure fell to 4.26 per cent of output.

Additional reporting by Sophie Cohen

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