Spanish Markets Sell Off as Constitutional Crisis Deepens

Spanish 10-year yields gained at further 5.0 basis points Wednesday and, at 1.76%, are at the highest level since March. The 5-year gained 5.7 bp, the 2-year 3.0 bp and, as of 3:06 PM GMT, the Spanish IBEX is down 2.8%, as investors flee Spanish assets.

There is no sign that Barcelona and Madrid will back down from their confrontation course. Catalonia’s leader has announced a statement for 9:00 PM CET and the regional parliament will convene on October 9, fueling speculation that Catalonia will declare independence next Monday.

A rare appearance by the Spanish King on TV did little to deescalate the situation, as he backed Madrid and Prime Minister Mariano Rajoy without commenting on the violence that surrounded the referendum. The central administration in Madrid, which already declared the referendum illegal, won’t accept that, and in theory could take control of the autonomous region, but applying even more force is unlikely to bring a solution and would only play into the hands of Catalonia’s leaders as they try to get backing from the European Union.

So far, EU officials refused to be drawn into the conflict, partly because they fear setting a precedent for separatist movements elsewhere in the Eurozone. They have also made clear that an independent Catalonia will no longer be part of the EU.

However, officials have widely condemned the use of violence, and if Rajoy deploys military to get Catalonia back under control, they will be forced to take a stand.

Investors, meanwhile, are staying clear of Spanish assets, and Italian and Portuguese bonds were also under pressure Wednesday, while the Italian MIB lost -1.42%.

The European Central Bank will watch developments carefully, and fresh tensions will only add to the arguments of those that do not want the central bank to commit to an end date for quantitative easing just yet.

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