The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

Why European Investors Should Be Worried About Catalonia!

Where or what is Catalonia? Well, it’s a very important province of Spain that includes Barcelona, the beautiful capital of Catalonia, where many of the country’s biggest companies are located.

There are two problems:

  1. Catalonia has been trying to get independence from its mother country, Spain, for many decades. Just as in the Basque country of northern Spain, Catalonia also has had its terrorists. I remember when I was visiting the country many years ago, one of the terrorists who had instigated a bombing, was found guilty and sentenced to death with the Garrote.
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    That’s a device put around the neck, and a screw is tightened until yours eyes pop out and your neck breaks, or you die of asphyxiation.  Not necessarily in that order. Not pretty.  But neither are the innocent victims of bombings.

  2.  The second problem is that Catalonia has been able to issue its own debt to finance projects. But now the debt has gone so high, it can’t repay it. Thus, the debt is already rated as junk. Furthermore, the rating agencies have said that they consider a default by Catalonia a default of Spain, which would cause a considerable downgrade of Spain’s debt. This makes the country of Spain basically hostage of Catalonia.
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    Knowing the Spanish mentality, neither side will give in. It’s all about “saving face.” Each side would rather go up in smoke than yield.  A debt default of Spain would wake up the bureaucrats in Brussels. And it would worse they already terrible situation of Italy, Greece, Portugal and others.

Below is an excellent article from Don Quijones who writes for Wolf Street.

Kamikaze Economics with Slow-Motion Debt Crash

In the absence of any hope of a negotiated settlement, tensions are sure to rise. For the semi-recovering economies of both Catalonia and Spain, that could be very bad news. Despite representing one-fifth of the national economy and being a significant net provider of funds to Madrid’s coffers, Catalonia can no longer issue its own debt and depends on the central government’s national liquidity fund (FLA, for its Spanish acronym) for about 60% of its funds.

As ratings agency Fitch warned in April last year when it sent Catalonian debt even deeper into junk territory, the region has grave liquidity problems that will require “proactive management” and “close collaboration with the central state ” — something that’s clearly not on the cards any time soon.

Standard & Poor’s cautioned that Catalonia’s management of its short-term risks “represents a much greater risk” than previously thought and it has “serious doubts about the region’s ability to cope with the short-term liquidity pressures it faces.”

For the full story:  http://bit.ly/2lAQ9jz

My view:  institutions are currently pouring lots of cash into the stock of the large European banks. They are betting that a recovery could cure all ills…at least for a while. And they could be right. The big European banks, such as Deutsche Bank, have had good rallies. But what will happen if Europe’s recovery attempt fails?

The US has a better chance of recovery because of the new President. The European countries still have their old, stale leaders, whose ideas are bankrupt. They bring nothing new to the table.

However, for investors who like the excitement of Russian Roulette with half the cylinders loaded, it could be fun for a while… at least until the next crisis hits. And it will. It’s just a matter of time.


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