Tension in Catalonia reaches crescendo ahead of independence vote

After years of talking about it, Sunday will finally see action in Catalonia as the region turns out to vote in a referendum on independence from Spain, even though it has been branded illegal by the government in Madrid.

Talks between Catalan parliament President Carles Puigdemont and Spanish Prime Minister Mariano Rajoy have failed to yield any meaningful resolution ahead of the 1 October referendum, where residents will be asked to vote ‘Si’ or ‘No’ on independence for the region.

Tensions have been running high in the days and weeks leading up to the event, with several Catalan officials being arrested for organising the ballot.

Rajoy has consistently pointed to the fact the Constitutional Court in Madrid has ruled the referendum to be illegal, but Puigdemont and the local government have pushed ahead with plans.

United Nations human rights experts weighted into the debate by warning that Madrid’s “worrying” attempts to ban the referendum appeared to violate fundamental rights.

Droves of police have arrived in Barcelona and other areas of Catalonia from many parts of Spain in order to beef up security, but it is not yet known whether they will attempt to prevent people from voting.

AFTERMATH

Regardless of what result emerges on Sunday, the reaction of both sides in the days immediately following the vote is seen as more important, particularly whether Madrid may agree to provide the region with more autonomy.

Those behind the Catalan independence movement claim that the industrially-strong north-eastern zone of Spain provides a disproportionate amount of income for the country without adequate return from the central government.

Analysts at Citi have pointed out that the referendum is unlikely to lead to a so-called ‘Catalexit’, but may lead to further escalating tension in the area that could hamper markets.

Citi said: “We continue to think the vote is unlikely to lead to Catalonia’s exit from Spain (Catalexit), and that snap regional elections in Catalonia will follow. We stress, however, that the risk of even larger confrontations between the two sides post-referendum is rising.”

On Friday, Spain's economy minister Luis de Guindos denied that the government had made a financial offer to the Catalans similar to that paid to the Basque region.

“The offer is not on the table and neither will it be... There’s no such thing as dialogue in a situation of illegality, outside of the constitution,” de Guindos said.

IBEX FLOUNDERING

Spain's Ibex 35 stock index has been weighed down by the tension surrounding the referendum in recent weeks, most notably following the raids on the offices of the Catalan Generalitat last week.

Banks with strong ties to Catalonia such as Sabadell and CaixaBank have been particularly as the rhetoric has grown in the days leading up to the vote. Both were down over 1% in trading on Friday morning as investors consider their positions ahead of Sunday.

London Capital Group’s Ipek Ozkardeskaya said investors should look out for volatility in euro markets on Monday.

“If the referendum is held as planned, the outcome could trigger some price volatility in the euro markets on Monday. A vote in favour of Catalan independence could weigh on the European integrity sentiment and hit the euro at next week’s open,” she said.

“In addition, the government’s reaction is important. Protests, a heavy-handed police intervention and political unrest could affect the euro-appetite in the aftermath of the Sunday’s referendum. On the other hand, a no vote should give a better colour to the single currency.”

While opinion polls have been inconclusive in the run-up to the referendum, one thing that is clear is that the so-called ‘Catalan question’ will not be answered unequivocally this Sunday.