Lessons For CFOs From Catalonia Crisis

In the face of rising political risks, nearly 1,900 companies have moved their seat out of Catalonia including some of the biggest in the region like Gas Natural and Abertis.

                   Risks At Play In Catalonia

Political risk comes in many forms and could be physical, financial, commercial, fiscal or legal.

Physical risks are usually associated either with some form of violence or with the seizing of physical assets. It could also include limitations on mobility or production due to street protests or general strikes. 

Implication for companies: Conflict in Catalonia has been mainly peaceful. Physical assets do not seem to be at risk and there is no fear of nationalizations. Protests or strikes, though, have already happened and might happen again.

Financial risk for companies could expose them to turbulence in public finances, financial and currency markets or to limited access to credit. Risks depend also on how likely a panic or a freeze of financial assets is. Spain being part of the Euro area, currency should not be a worry. 

Implication for companies: The crisis is affecting the outlook for Spain’s and Catalonia ratings and, should independence be declared, a default on the part of the Catalan government is considered very likely. Sabadell and Caixabank probably averted a financial panic by moving their seats out of Catalonia. But if independence is declared, some form of limitation to access to deposits is not to be excluded.

Commercial risks may come in the form of reduced access to markets, new regulations or new duties, or can derive from the consequences of political conflicts on a brand’s image or on costumer’s trust.

Implication for companies: These are probably some of the main concerns for companies operating in Catalonia. Separatists are campaigning to create new borders, and these borders would leave Catalan companies out of the EU and the European Single Market. On the other hand, there might be some kind of boycott on Catalan products in the Spanish market, and customer’s diminished trust is likely to impact orders.

Tax risk with regulation changes are one of the most typical and widespread political risk factors. In this particular case, another factor can be added to the mix.

Implication for companies: If there were a declaration of independence, there are chances that Catalan companies could find themselves in a region with a Spanish and a Catalan parallel and competing tax systems, both claiming legitimacy.

Legal risk: Finally, the legal implications of the conflict need to be assessed. Three factors should be considered: regulations and potential changes in them, clarity on what the applicable law is, and the ability of the judiciary and the executive branches to enforce the law.

Implication for companies: In the event of a declaration of independence, there would likely be a period of great uncertainty that would affect all of these three aspects.

Since then, and after major demonstrations on both sides of the conflict, the Spanish government has triggered Article 155 of the Constitution which allows it to take back administrative control of the regional government if the latter is acting against the law or the general interest.While murmurs of companies moving out of Catalonia owing to political unrest started as early as 2012, the year the conflict started building up, the great exodus started right after the secession vote on October 1 this year. The vote was declared illegal by Spanish courts but the Catalan Government decided to give it the go ahead. That same night, the Catalan President declared he considered the results as binding, despite the incidents with the national police and the lack of democratic guarantees.

Why are companies leaving?

While not many fear the conflict turning violent, instability, legal insecurity and the risk of finding themselves out of the EU are some of the factors leading companies to leave.

The financial sector is specifically more at risk. On October 5, in response to customers and investors concerns and a fall of almost 10% for its stock price in the three days following the referendum, Banc de Sabadell held a Board meeting to move its legal seat outside of Catalonia.

The next day, Caixabank too announced they were following suit. The company declared in an e-mailed statement that the goal of the decision was “to protect the interests of its customers, shareholders and staff, by ensuring the bank stays in the Eurozone and under the supervision of the European Central Bank (ECB).”

By moving their headquarters, these banks ensured the bank’s access to ECB’s financing and safeguarded the deposits of their costumers by keeping them under the protection of the Spanish Deposit Guarantee Fund.

Contacted by Global Finance, Walter Joosten, president of the Dutch Business Circle in Barcelona, was convinced that the Catalonia situation would be resolved in a matter of months, “It’s a disaster. It will be hard to get all those companies back. But Spain is standing firm and the stock market is holding better than expected”. He added, “Only a few Dutch companies have left, only those that make most of their trade with Spain.”

Joosten is convinced that the reason for companies leaving has more to do with reassuring costumers and shareholders than with the risk of an actual secession: “This is not going to happen,” he says.

But whatever probability is assigned to secession, risks remain, and even if secession is finally not declared, political instability can present specific risks for a number of companies in the form of reduced orders, impact on stock prices or a tightening credit market.

What are the factors to consider in any situation and how are they playing in this case? Takr a look at the box on the left to see how various risks could affect company operations.