Saturday, October 28, 2017

CATALAN INDEPENDENCE: The economic consecuences

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In this new video we'll talk about one of the most important emotions in the stockmarkets, fear, and how it will affect the attempt at Catalonian independence.
There are many other emotions present in the stockmarkets, such as greed, when for example, at the end of a bubble many people hold on to their shares trying to earn the last euro, often with terrible results.
But fear is probably the most powerful of emotions, it is what turns a fall in the stockmarket into an out of control stampede, as small and not so small investors sell their products in a panic.
Because while powerful investors see falls in numbers and percentual points, very small investors see their live savings decrease massively in value, money they need to pay their mortgage, car installments or the school for their kids.
And when large scale changes cause any sort of instability, thousands or millions of normal people get scared, sell at decreasingly lower values, and the stockmarkets fall; and there are few changes that could cause more instability in the European Union than the independence of Catalonia from Spain.
There are many reasons for this:
Catalonia's economy alone is larger than several medium-sized countries in the European Union, so massive changes to it would affect the whole Union.
Europe is an old continent with a long history, so almost every country has at least one independentist movement if not several, and all of those would come alive with a succesful independence of Catalonia, repeating the same instability.
As stated by many European officials, the independence of Catalonia would mean it would no longer belong to the European Union, causing a nightmare for exports and imports, finance and the economy at large.
All this has caused fear in the stockmarkets, it's symptoms clear for all to see:  steep fall in the IBEX 35 with the announcement of the referendum's results,  movement of headquarters from Catalonia to other regions of Spain starting with many large companies such as CaixaBank, Gas Natural, Abertis, Sabadell Bank, Agbar, etc.
Because the consecuences for companies remaining in Catalonia, and the Catalonian economy at large, would be dire:
-Clients with accounts in banks outside of Spain would no longer be protected by the Deposit Guarantee Fund of Spain. As a result, many people in Catalonia have already created accounts in other parts of Spain.
-When companies have their headquarters outside the European Union, they are not longer under its protective umbrella, don't have the support of the European Central Bank nor do they  enjoy the guarantee of legal certainty under its regulations.
-Being part of the European Union, Spain has access to debt at low interest rates, of which Catalan banks benefit. An independent Catalonia would initially have a terrible debt rating, and as such asking for money in the international markets would be extremely expensive.
-If a company in an independent Catalonia exports to the rest of the European Union, until a treaty exists it would have to pay tariffs, making its products less competitive.
-Foreign investors' doubts about the instability of the region will probably negatively affect Spain's and in particular Catalonia's ability to attract investments for many years, wether there is independence or not.
Consecuences such as these scare shareholders, which means their employees, the boards of directors of their companies, have to react to ensure their shareholder's money is safe. This is the reason behind the headquarters movements in the last few days.
But don't take my word for it and look at Quevec: before the independence movement the region was the richest in Canada, but the instability of its referendums led many companies and people to leave, causing other regions to surpass it.
Of course, as an investor, these crises frighten me, but at the same time, and as heartless as it sounds, I recognize they are also opportunities if I carefully analyze where I could invest my money if share prices go down.
As always, best of luck in your investments.

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