The T-Report: Quebec Welcomes Catalonia to the United Nations!

Posted by on Nov 26, 2012 in The T-Report | No Comments

But Quebec Isn’t a Country?


The Catalonian elections are interesting and shouldn’t surprise anyone. In stressful economic times people look for alternatives. They want someone to blame (“the other guy”) and like to be told how great they themselves are. If that wasn’t the case, it is unlikely that an angry megalomaniac with a toothbrush moustache would ever have ruled Germany.

At this stage, the elections and referendum movement remind me a lot of Quebec in Canada. Economic decline coupled with an identity lead to the belief that separation was a good way to go. For many of us outside of Spain it is hard to realize how long Catalonians have held a belief that they are different. I remember back in the 1980’s being corrected by a soccer player when I said he was Spanish, and he replied, with a bit of anger, that no, he was Catalonian.

So on the one hand, Catalonians are displeased with being in Spain. On the other hand, there is no real plan for separation. Just as in Quebec, it is very hard to separate. Who owes what to whom is the first question? Catalonia would surely like to avoid assuming any debt, and would like the benefit of all government money that has been spent there on anything and everything, including basic infrastructure. Spain on the other hand would want Catalonia to take most of the debt, pay them for things like roads, a share of the electrical grid (as bad as that grid may be), etc. Both sides can frame referendum after referendum with vague questions and declare some form of victory. The first referendum is usually along the lines of “would you like to keep all the good stuff, get more good stuff, and get rid of bad stuff, which can happen if you vote yes”. The yes vote, unsurprisingly does well, but even some Keynesians would question whether the new country can deliver on such hefty promises. It can’t.

The vote is definitely worth watching, but more of a sign of growing unrest than any immediate change in Spain. The key here will be whether Rajoy can leverage the outcome in Catalonia in such a way to get a less austere, less restrictive bailout package than has been on the table.

More Mundane Politics

Greece and the Fiscal Cliff are more important to the markets and we need to see some progress this week.

I expect we see some attempt to create a new and more comprehensive plan for Greece. I don’t think it will work because the Troika hasn’t quite got their head around the idea of taking losses, but I think any announcement today or tomorrow on Greece will move us right to the edge of that logical outcome. The importance of the new Greek plan has less to do with Greece (for the markets if not the Greek people) and far more about what it signals future intentions of the Troika will be. Will they remain the tight fisted, heavy handed, lenders of last retort, or turn into flamboyant money droppers acting truly as lenders of first resort in a manner that would make Ben blush? Okay, the Troika will never act as aggressively as the Fed, but some movement in that direction would be welcome by all.

On Fiscal Cliff, it is time to see some progress. We have had the “kumbaya” moment with the various leaders standing around and pledging to work together. The rational outcome is an agreement and they should be making steady progress towards that. Since rational and Washington shouldn’t be used in the same sentence (unless that sentence oozes sarcasm or drips with vitriol) then we won’t get that nice path to a conclusion. It is not out of the question that even if we get a good final outcome we will hit some speed bumps and this week could be that. I would not be surprised to see an announcement or two complaining about the other side not “negotiating in good faith”. The markets won’t like that and will sell-off.

So while remaining very bullish, I am looking for a bounce from this morning’s lows on some Greek resolution, but would want to be a bit cautious on risk then in case we see some negative headlines out of Washington.