The Catalan parliament has declared independence from Spain. So what happens to national debt if a nation ceases to exist? © Reuters

Spanish stocks missed out on a broader rally in European equities on Friday after a vote by Catalonia’s regional parliament for independence deepened the country’s worst political crisis since the 1970s.

The benchmark Ibex 35 index, home to Spain’s largest companies, fell as much as 2 per cent after a vote by the Catalan parliament which its anti-independence parties refused to participate in.

Spain’s government bonds also bucked a broad rally in fixed-income markets that followed the European Central Bank’s cautious retreat from its quantitative easing programme on Thursday. The yield on Spain’s 10-year bond rose 5 basis points to 1.57 per cent.

“The central government in Madrid will now attempt to take direct administrative control of Catalonia following the region’s declaration of independence,” said Stephen Brown of Capital Economics. “We still think that the economic effects of this political crisis will be fairly manageable. But the risks are clearly rising.”

Catalonian banks were among the biggest fallers, with Banco de Sabadell down 4.8 per cent and CaixaBank down 2.9 per cent.

The Madrid-listed stock of IAG, the Anglo-Spanish airline, was the biggest single faller, down by nearly 7 per cent. Meanwhile, the group’s London shares led the fallers on the FTSE 100, sinking 6.3 per cent.

Shares in the company, which owns Iberia and British Airways, had slipped earlier on Friday after reporting disappointing third-quarter results, but dropped further after the independence vote.

“As markets remain convinced that the current crisis will not threaten the Spanish state, the negative reaction on the bond market should remain contained,” said Steven Trypsteen of ING Bank.

The deepening of Spain’s crisis also strengthened demand for Treasuries, with the ten-year yield dropping 3bp to 2.42 per cent. Yields on German bunds — a benchmark for the eurozone — fell 4bp to 0.39 per cent

“The Treasury bulls are back as a short-covering scramble ensues across the curve amid the showdown over Catalonia,” said Action Economics analysts.

Already weakened by the ECB’s decision to keep buying bonds for much of next year, the euro fell further on the Catalan vote. The single currency dropped 0.6 per cent to $1.1579 to a three-month low.

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