Spanish stocks fell and the euro slipped after Catalan separatists gained a majority in the region's parliament, prompting fears of further disruption in the region which tried to break away from Spain in October.
But, with leading members of the new Catalan parliament either on the run from Spanish authorities or in prison for rebellion, and no possibility that the central government will budge in its opposition to any attempt at secession, analysts said a new regional government would make little headway toward the creation of a new republic.
Spain's benchmark Ibex-35 stock index was down 1.1% at 3:24 p.m. local time, as Barcelona-based banks CaixaBank SA and Banco de Sabadell SA each slid more than 3%. Both banks, while retaining headquarters in Catalonia, were among hundreds of companies to move their legal addresses outside the region in October, when a unilateral declaration of independence following a banned referendum was followed by the imposition of direct rule from Madrid and criminal charges against leading Catalan nationalists. The yield on Spain's 10-year bonds was little changed after earlier rising as much as 5 basis points and the euro retreated 0.2% to $1.1847.
While the narrow majority for pro-independence parties in the Dec. 21 vote is an embarrassment for Spain's conservative Prime Minister Mariano Rajoy, who attracted international criticism for what some called heavy-handed policing of the Catalan referendum, the separatists might struggle to form a government, perhaps prompting fresh elections next May, Barclays analyst Antonio Garcia Pascual noted. In the event a pro-independence government is formed, the overwhelming unionist majority in the Spanish parliament would mean that any calls for constitutional reform to allow a legal re-run of the referendum would be "highly unlikely to see any progress."
One side-effect of the Catalan crisis has been the drop in support at a Spanish level for far-left Podemos, as unionist parties, particularly the centrist Citizens, which came first in the Catalonia election with 25% of the vote, have seen their votes rise, Garcia Pascual noted. This might boost the possibility that the ruling conservatives might be able to form a majority, with the backing of Citizens, if there is a general election soon, he said.
Market fallout from the vote is likely to be short-lived, TD Securities analysts James Rossiter and Ned Rumpeltin wrote: "These events remain very unlikely to change the outlook for growth, inflation, or monetary policy for the euro area as a whole."
Political risk is not set to drive trading in the single currency as a result of the Catalan issue, they said. But they added: "This may become more of a factor in the run up to the Italian national elections, which look set for early March next year."