Markets Shudder Across The Globe As Worst Case Scenario Materializes In Spain

Well now it gets interesting.

Spain is going to go ahead and apply Article 155.

Thursday was another deadline for Catalan President Carles Puigdemont and instead of repudiating the independence declaration that he actually didn’t really make on Monday, he decided to tell Mariano Rajoy how upset he is that his request for a face-to-face meeting was ignored.

Here is the actual moment on the City Hall clock in Barcelona, when Thursday’s deadline passed:

“In my letter on Monday, I proposed that we hold a meeting and have had no response,” Puigdemont said in letter to the Spanish premier on Thursday. “My request for the repression to end has not been met either,” Puigdemont added. “On the contrary, it has increased.”

Well Carles, when it comes to the “repression,” you probably ain’t seen nothin’ yet. Because now Madrid is really irritated.

The government has now called an extraordinary cabinet meeting for Saturday to approve measures to activate Article 155 and they say they’ll “use all [the] means they have to restore the rule of law in Catalonia as soon as possible.” Just to be clear, that means they’re going to suspend Catalonia’s autonomy. Article 155 of Spain’s 1978 constitution allows the central government to seize control of the region’s finances and police.

“The rule of law cannot accept the threat posed by Catalan President Carles Puigdemont,” Spanish Socialist party spokesman Jose Luis Abalos said at a news conference in Madrid, before adding that “Spain’s territorial integrity is not negotiable.”

Markets aren’t lovin’ it and less-than-inspiring earnings from Unilever and SAP aren’t helping. European equities are down across the board, with the IBEX still not down as much as it probably should be:

The VStoxx is spiking just a day after hitting a record intraday low:

Spain 5Y CDS is quoted at 73.53 as of 9:56am London. For context, that’s wider than South Korea (70.38) and India (71.76) and just inside inside Peru (78.04) and Panama (78.30).

Here’s S&P futs:

Treasurys rally:

And predictable reactions in gold and USDJPY:

As Barclays wrote over the weekend, this was looking more and more like the most likely outcome, even as it’s the most unfriendly for markets. Here’s an excerpt from their piece which provides some useful color:

The conflict could escalate: At this point, it appears more likely than not that Article 155 will be triggered; demonstrations and disruptions by the more radical separatists could follow (even without Article 155 being triggered). It is not clear how Article 155 would be applied; how much control the central government would and could exercise or for how long. On the positive side, the offer by PP, PSOE and Ciudadanos to reform the Constitution — they have the majority required — could help to meet some demands of the moderate nationalist groups in Catalonia. Art 155 might be avoided by calling regional elections.

Fiscal control: The central government has the institutions and legal framework to take fiscal control. In fact, Catalonia has been under the tight budgetary control of the central administration since the financial crisis. On the funding side, as of Q2 17, Catalonia received €52.5bn, or 68% of Catalonia’s €77bn public debt through the central government funding facility, and it is also by far the biggest user of it, representing 33% of its total lending.

While Spanish law contains a no-bailout rule for the regions, in our baseline scenario we expect that the central government will continue to provide the necessary funding to Catalonia so that it can continue to meet its financial obligations.