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Catalonia’s Independence Vote Poses Huge Risks for Spain’s Red Hot Economy

Spain’s run as the region’s fastest-growing major economy, not to mention its scorching hot stock market, could be halted by a potentially dangerous clash between Madrid and Barcelona over Catalonia’s weekend referendum on independence.

The Sunday vote, which the federal government has declared illegal and is determined to stop, could accelerate the region’s drive for deeper autonomy from Madrid and complicate the broader European Union’s efforts to establish a common strategy for growth and political cohesion following Britain’s decision to leave the bloc in June of last year.

Catalonia independence movement has long fought for separation from Madrid, but its support has grown since the country’s debt and banking sector crisis in 2012 and the strict fiscal austerity that followed. Many in the region, Spain’s richest, feel that it has shouldered and unfair burden in paying for a crisis that emanated from the banking sector in the Spanish capital, not in the industrial region in the northeast.

Furthermore, despite the fact that Catalonia contributes the lion’s share of tax revenues collected by Madrid from the country’s seventeen autonomous regions, it doesn’t have the same powers of taxation enjoyed by its neighbors in Navarre and the Basque region.

That said, while a previous non-binding independence referendum three years ago was supported by 80% of those who voted, less than a third of Catalans bothered to turn up.

Nonetheless, the prospect of a stronger support for independence has spooked politicians in Madrid and the fragile coalition government of Prime Minister Mariano Rajoy, who has ordered police to remove ballot papers, close public buildings and prevent people from casting a vote this weekend.

And it’s easy to see why: the Bank of Spain said Friday that the country’s debt level reached E1.138 trillion ($1.34 trillion) in the second quarter, a figure that’s 100% of the GDP in Europe’s fifth largest economy.

Thankfully for Rajoy, that economy has expanded for sixteen straight quarters and should grow at a 3.1% clip this year, a tally that would well outpace Eurozone partners France, Germany and Italy.

Spain’s IBEX index, which benchmark’s the country’s 35 biggest stocks, is also hot and has gained more than 10.3% so far this year – 24% when adjusted into U.S dollar returns.

Putting that performance at risk, either via a violent clash with independence advocates that scares away new foreign investment if he tries to stop the vote or risking the potential loss of his most important region if he doesn’t, is something Rajoy simply can’t allow if he wants to keep his unpopular government in power.

And that means the stakes heading into Sunday couldn’t be higher.