October 22, 2017 / 7:49 PM / 2 years ago

Direct Catalonia crisis key risk to Spain rating: S&P

LONDON (Reuters) - S&P Global said on Wednesday it had no specific view on whether or not Spain reinstates direct rule over Catalonia, but is instead waiting to see whether the crisis does any sustained damage to a robust economic recovery.

A damaged Estelada (Catalan flag of independence) hangs from a balcony in Barcelona, Spain, October 20, 2017. REUTERS/Ivan Alvarado

S&P has a “positive outlook” on its BBB+ Spanish sovereign rating, but the strains over Catalonia’s bid for independence have cast doubt over the near-term upgrade prospects.

Catalonia’s regional leaders face a deadline on Thursday on whether or not to stick to, or abandon, an independence declaration made last week which Madrid has rejected as illegal.

Madrid in turn is threatening to invoke a never-before-used clause of the country’s 1978 constitution, known as Article 155, to reimpose direct rule over the eastern region. [nL8N1MR0LI]

“It remains to be seen what happens. There is clearly a lot of interest in de-escalating the situation so we don’t really have a specific view on whether Article 155 is triggered or not,” Frank Gill, one of S&P’s top sovereign analysts and who is also based in Madrid, told Reuters.

What the firm is looking at more, he said, was what it might do to Spain’s economic and fiscal performance. Before last week’s independence declaration, S&P said it did not expect to cut Spain’s rating unless tensions escalated. [nFWN1MN0RE]

“This is an economy that is growing at 3 percent, this expansion is funded by debt, export performance is picking up - it’s been remarkable - so the question is, what does Catalonia mean for all of that?”

Spanish Prime Minister Mariano Rajoy issued an appeal for support in the country’s national parliament on Wednesday to take direct control of Catalonia unless the rebel regional government drops its plan to break away. [nL8N1MT1MA]

The move would need only a vote in Spain’s upper house, where Rajoy’s People’s Party holds an absolute majority. It would be the first time in Spain’s four decades of democracy that direct rule has been imposed on a particular region.

The uncertainty has already prompted hundreds of Catalan firms to move their headquarters, led Madrid to trim its economic growth forecasts and buffeted the country’s financial markets.

Gill added that S&P was also keeping an eye on the potential impact on Spain’s debt-to-GDP level, which at more than 96 percent remains one of the highest in Europe.

“There is still a lot of work to be done in terms of improving the budgetary position,” he said. “It (Catalonia situation) is a very fluid matter.”

Reporting by Marc Jones; editing by Mark Heinrich

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