The FT has reported that uncertainty haunts the Spanish sovereign bond market:
The rise in Spanish borrowing costs follows escalating uncertainty over whether Madrid will accept the terms demanded by the ECB. Alan Wilde, head of fixed income at Baring Asset Management, said Mariano Rajoy, Spain’s prime minister, had signalled he was testing market reaction before deciding his next move. “It is inevitable that markets will want to test what happens if bond yields get back to 7 per cent.”
Markets have also become concerned by rising political tensions over Spain’s fiscal plans and by snap elections called by the economically powerful Catalonia region, which is expected to serve as a proxy referendum on independence.
And this is where Europe passes another red line without political intervention from Brussels. Since European solidarity is not forthcoming during a time where only European sensibility is needed (many of the non-performing loans will not be repaid no matter what, why not write them off now instead of letting government bail out the banks that hold them?), now nobody says anything that with-nation solidarity is going down. The fight between Catalonia and Madrid is one about fiscal federalism, with industrial and relatively rich Catalonia net financing rural regions like Extremadura and Andalusia. It is also about national identity, but that discussion has been around for decades. It is the financial crisis that now makes that topic a top priority. Of course, Catalonia might see secession as a political tool to make the government in Madrid accept European bail-out money, which is badly needed. The result of all this is fundamental uncertainty. It is clearly not creating the virtuous cycle that is needed to bring about growth and prosperity.