How will Spain pay her debts? American investors deserve to know

We would like to share with you this article from our friends of Help Catalonia. Thanks Alexandre Calvo i Cristina.

It says “Japanese” investors but is equally applicable to US citizens and corporations.

How will Spain pay her debts? Japanese investors deserve to know

Rajoy’s recent trip to Japan featured bland smiles, diplomatic niceties, and the customary announcements about closer cooperation. It is clear, though, that the Spanish prime minister failed to address some key issues of interest to Japan. Among them, the fate of the Spanish national debt. Faced with Catalonia’s decision to resume sovereignty, clear in the 1.6-million “Catalan Way” human chain on 11 September, the Spanish leader needs to articulate a strategy to protect the legitimate interests of foreign investors holding Spanish bonds.


To date, faced with Catalonia’s relentless march towards a resumption of sovereignty, the Rajoy administration’s response has been rather dull and predictable. Appeals to the Spanish Constitution (largely drafted by the Spanish military shortly after Dictator Franco’s death) and not always disguised threats of armed intervention. These may work when a minority is involved, but jailing or shooting millions of people is rather a tall order, and by stressing the possibility Madrid is just losing what little credibility she has left. The Spanish Government has also threatened to not only withhold recognition of the new state but to block Catalan EU membership. Any informed observer can see through such threats. The reason is clear: unless Catalonia is immediately recognized by Spain, she will not be bound to take up a share of the Spanish national debt.

A deal is thus a must, in particular in view of Spain’s bailout. Will the IMF and the EU stand idly by, while Spain goes bankrupt due to her stubborn refusal to recognize Catalan independence? Does anybody seriously think that Madrid can deal with a 125% debt to GDP ratio (the rough estimate once Catalonia leaves) on her own? Furthermore, will the international community look the other way while Spain not only sinks but drags down the euro down with her? A most doubtful proposition.


Thus, one would expect Spanish authorities to start openly discussing this. They cannot prevent Catalonia from leaving, but they can try to minimize the resulting short-term economic disruption on Spain proper (in the long run, losing Catalonia would not necessarily be bad for Spain, since it may force the implementation of long-delayed reforms and the growth of a stronger work ethic). They could also try to ensure continued access to the international financial markets.

International investors, in Japan and other countries, mostly do not care whether Catalonia is part of Spain or not. However, they do care about getting their money back. With interest. On time.

Thus, refusing to openly discuss this leads nowhere. Catalans are not changing their mind to make Rajoy’s life abroad easier.


It may be tempting, very tempting, for Catalonia to simply forget about the Spanish national debt. After all, the funds were not invested there. According to official statistics Catalonia runs a primary surplus and forcibly contributes 8.5% of her GDP to the Spanish coffers. Therefore, if Madrid was right and a new state was not part of the treaties signed by the parent state (Spanish commentators are saying this to frighten Catalans with the specter of exclusion from the European Union), then the same principle would mean that the new state would not be liable to repay any portion of the parent state’s national debt.

International lawyers may well argue about this, and as always both sides may have a point (that is how lawyers earn a living, after all), but let us be realistic. Foreign investors are not interested in technicalities and legal debates. What they want is an assurance that they will  get their money back, that political developments and in particular the (re)emergence of a state will not interfere with their legitimate rights and expectations. In other words: they are concerned about predictability and the rule of law.

Since Catalonia needs the recognition of other states to regain her independence, and Spain needs the continued goodwill of those same states to keep functioning, there is really no alternative to a debt-splitting deal. We may argue about the precise share that Catalonia is to take and the technical aspects of the split, but the leading powers of the world are not going to sacrifice their economic interests at the altar of Spanish pride. That goes for Japan as well.


Let us thus go back to the Spanish Prime Minister’s trip to Japan, which according to his own administration was centered on economic issues. What would have been a responsible attitude by the Spanish leader? First of all, an open acknowledgment that Catalonia is leaving. They already know, of course. In the Internet era you cannot hide 1.6 million people peacefully holding hands to demand independence, and shooting them does not look too good on CNN. The world already knows. The time has thus come to arrange the details, and to do so in a civilized manner, if at all possible.

After acknowledging this, change is after all part of life and should not be feared, a true statesman would have sought to allay any fears by his hosts. In this case, any fear that Spain proper may be forced to default. These fears are understandable. Madrid would have already defaulted without the EU-IMF bailout, but she has not learned the lesson and is still engaged in self-destructive economic policies. Spain is still blocking fast train connections between Barcelona Harbor and France (which private companies are offering to build at no cost to taxpayers) while building new railways to nowhere. Foreign investors and governments are aware of the political difficulties involved in expanding financial assistance of Spain. For example, a growing chorus of British voices is calling for a boycott of Spanish goods and a refusal to grant more assistance to Madrid, due to Spain’s harassment of Gibraltar and transfer of Mirage warplanes to Argentina. In the Northern European countries, more and more people are openly stating their opposition to more handouts and subsidies to Spain. Others do not dare say it in public, but privately express their anger.

Unfortunately, Rajoy persisted in ignoring reality, and in sugarcoating his country’s true state of affairs. Time is running out to persist in such attitudes. Reality has a nasty habit of catching up with rhetoric. Much better to take the lead and avoid surprises in the bond market by launching negotiations and assuring investors that they will not suffer any losses.


From the above we can conclude that his trip to Japan was a missed opportunity for Rajoy. A missed opportunity to appear as a true statesman, realistically examining the consequences of his country’s impending loss of Catalonia (you cannot shoot 1.6 million people in front of CNN’s cameras) and dealing with the consequences in a civilized manner, minimizing any resulting disruption to Japanese and other international investors. He can still change course, but time is running out. If he does not take the lead, it will be those same international investors and their governments who will. Some are already speaking out.

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