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Moody's identifies sweeping adverse credit effects from Catalonia's secession


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Moody's identifies sweeping adverse credit effects from Catalonia's secession

Catalonia's secession from Spain would have broad negative credit implications for a wide range of bond issuers in Spain and Catalonia, including banks, insurers and nonfinancial corporates, Moody's said in a report.

"Despite heightened tensions between the Catalan regional government and the central Spanish authorities, our central scenario remains that Catalunya will continue to be part of the Kingdom of Spain," said Colin Ellis, a Moody's managing director and the report's co-author.

However, Moody's said Catalonia's independence cannot be ruled out over the longer term as the situation is fluid. The independence process could be disruptive, with significant operational risks, potential financial or economic fallout, and changes in institutional frameworks. The exact nature of any future relationship with the EU and what currency a newly independent Catalonia will use is uncertain.

The rating agency said most pools of Spanish assets underpinning structured finance transactions have exposure to Catalan borrowers so these transactions can also be affected.

Catalonia's liquidity position has weakened significantly in recent years and it could struggle to get access to financial markets as a newly independent state, Moody's said. Catalonia's independence could also lead to political turmoil in other parts of Spain or the EU, which could have negative credit implications for an even broader range of issuers.

Moody's said Spain would continue to boast significant credit strengths and is expected to maintain its investment grade ratings after a potential secession. It said the impact of independence on Catalonia's current Ba3 rating is uncertain as its assessment of the region's stand-alone financial strength that excludes extraordinary government support is lower at just caa1. Fitch Ratings on Oct. 5 placed Catalonia's BB long-term foreign and local currency issuer default ratings on Rating Watch Negative.

Spain's ruling party is in talks with the main opposition party to dissolve the parliament of Catalonia. The Constitutional Court of Spain ordered the suspension of a Catalan parliamentary session to be held on Oct. 9 that could produce a declaration of independence.