Catalonia is set to declare independence from Spain later Oct. 10, a move which will likely be met with the imposition of direct rule from Madrid, triggering protests, endangering the Spanish economy and sparking volatility in capital markets, Barclays Plc and Société Générale SA said in separate research reports.
"At this point, it seems that likely that Catalan President Carles Puigdemont remains on track to announce a unilateral declaration of independence as early as today," Barclays analysts said, referring to a meeting of the region's parliament set for 6 p.m. local time in which the separatist leader has said he will review the results of an informal referendum Oct. 1.
The Catalan government said citizens overwhelmingly backed independence, but police tried to impede the banned vote, resulting in a lower turnout.
Conservative Spanish Prime Minister Mariano Rajoy is likely to activate Article 155 of Spain's constitution to take control of devolved powers, Barclays said.
"In our view, the triggering of Article 155 is likely to be met with demonstrations by pro-independence groups that are likely to paralyze activity in large cities in Catalonia," Barclays said. "We do not rule out clashes with the police. This means that market volatility is likely to increase in the coming days."
Spanish sovereign bonds, known as Bonos, could take a hit, said SocGen, which warned of the possibility of "sporadic or chronic episodes of violence" and, eventually, "negative consequences for the Spanish economy."
"An immediate declaration of independence would be the most risk-averse scenario for Bonos, with tensions escalating further as the government takes control of the region by applying Article 155. In comparison, a deferred decision would result in a more contained reaction," SocGen said, explaining that only long negotiations and possibly mediation would end the conflict, with an eventual deal for greater Catalan autonomy or a legal referendum.
"Overall, we think that the headline risk remains high and is skewed towards further underperformance in Bonos."
The Catalan parliament's meeting comes as local businesses have taken drastic measures to avoid any risk of economic disruption. Companies including CaixaBank SA, Banco de Sabadell SA and Gas Natural SDG SA have said in recent days that they will move their legal addresses out of the region.