Daily Comment (October 10, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Although it was mostly quiet overnight, we are awaiting a potential declaration of independence from Catalonia.  Here is what we are tracking this morning:

A declaration of independence?  Catalan Leader Carles Puigdemont is expected to address the regional parliament in Barcelona at 11:00 EDT amid growing speculation that he will declare independence.  According to reports, the Spanish national police are poised to arrest him if he follows through.  However, there is a bit of nuance in the announcement.  Puigdemont may make a declaration of independence but it may not be immediate or unilateral.  That outcome would be crafted to avoid his arrest and open a dialogue with Madrid.  Of course, that action would disappoint much of his separatist coalition.  On the other hand, if he goes for a unilateral declaration of independence, the region could face a military crackdown.  The risk of a hard response from Madrid is that it could trigger sympathy for independence.  Reliable polling is rather scarce but the latest polls from July indicate 41% support for independence, with 49% opposing separation.  We suspect these numbers are a reasonably accurate reflection of voter attitudes.  If Rajoy simply allows for a broad vote without interference (last week’s vote was boycotted by supporters of remaining in Spain), we suspect independence would lose.  Apparently, Madrid feels uncomfortable with taking that chance.  So far, problems in Spain have mainly been contained in Spanish financial assets.  However, a breakaway problem in Spain could trigger similar movements elsewhere and lead to a collapse of the unity movement create by the European Union.  If such a drive to self-determination gains momentum, the EUR could be undermined and depreciate.

North Korean hack: Korean lawmakers said yesterday that there is evidence North Korea hacked into classified South Korean military documents which included the blueprint for leadership decapitation operations against Kim Jong-un.  North Korea is known to have sophisticated cyberwar capabilities.  They are believed to have hacked into Sony Pictures (SNE (ADR) $37.04) and recently have attempted to steal bitcoin from South Korean cryptocurrency exchanges.[1]  This news should be treated with caution.  Although it is quite possible that North Korea was able to steal this information, it is also possible that South Korea allowed the North to take the data as part of a disinformation campaign.

Macron, Merkel disagree on EU reform: French President Macron has proposed reforms to the EU that include a unified fiscal budget and loose rules about debt restructuring.  Germany, as expected, wants strict restructuring rules, which would likely lead to a greater divergence in Eurozone borrowing costs and reliance on individual nations to manage their fiscal affairs.  Germany is a creditor state; it has no interest in making things easier for debtor nations.  What the Germans fail to realize is that their pile of savings will do them little good if they can’t find a place to loan and invest these funds.  For now, both nations remain in their respective corners with little likelihood of massive changes along the lines of further unification of the EU.

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[1] https://www.ft.com/content/c245372a-a4e0-11e7-9e4f-7f5e6a7c98a2 (paywall)