LONDONLONDON (Reuters) - Investors who lend billions of euros to Spain every year are struggling to sketch out the repercussions for the country's finances of a possible independence proclamation by the wealthy region of Catalonia.
Regional leader Carles Puigdemont prepared to address on Tuesday a parliamentary session that may unilaterally declare independence from Spain following a banned referendum on Oct. 1.
Such a move would drive a wedge between the Spanish government and a region that makes up a fifth of the country's economic output and more than a quarter of its exports.
As one fund manager told Reuters, working out how all this will pan out for the euro zone's fourth largest economy is "so complicated it makes Brexit look like a walk in the park," but here are some of the best guesses so far:
This is the scenario - considered unlikely by many analysts -- that could prove most damaging to Spain's overall financial position, its economy and government borrowing costs.
Secession would be also expected to harm Catalonia's economy, while uncertainty is likely to push up bond yields in both a newly-independent state as well as for Spain.
According to ABN AMRO, Catalan independence could raise Spain's government-debt ratio to as high as 115 percent of GDP from current levels around 99 percent - leapfrogging Cyprus and Belgium to have the fourth largest debt load in the euro area.
However, Catalonia has said it would take responsibility for its share of central government debt, reducing the burden on Spain.
But the real problem would be how Spain would balance its books without Catalonia's contribution. At roughly 4.5 percent of GDP in 2016, Spain already has the highest budget deficit in the euro zone.
Fathom Consulting said if Catalonia leaves, the economic shock could see the budget deficit run to nearly 7 percent in a couple of years - back to levels seen in the wake of the euro zone debt crisis. ABN AMRO forecasts a deficit of 5.5-6 percent.
Many analysts expect the likely outcome of Spain's worst political crisis in decades will be greater devolution of powers to Catalonia like those enjoyed by the Basque country.
But generous fiscal autonomy from Madrid could come at considerable cost to the public purse.
According to a 2014 study by research house CSIC, the Spanish state could lose about 16 billion euros. That would equal about 13 percent of next year's budget.
"It would be painful economically," said Tim Davis, chief investment strategist at Fathom Consulting. "The budget deficit in Spain would increase and then you would need to see some kind of additional austerity to plug that gap or you would start to see bond yields rise."
3. STATUS QUO
It does not seem there is any outcome that leaves Spain's economy unscathed.
Rating agencies have already said the tensions alone could have negative consequences for Spain's credit rank, deterring investment and weakening the ability of Spain's minority Popular Party government to implement national policy.
The crisis already looks to have claimed its first victim: a delay in passing the 2018 budget.
Tensions will only increase if Catalonia defies Madrid and declares independence over the coming days. One of the tools at Spain's disposal is to trigger Article 155 of the constitution, which would allows it to take control of devolved powers.
(This story has been refiled to remove erroneous word in paragraph 3.)
(Reporting by John Geddie and Dhara Ranasinghe, Additional reporting by Sonya Dowsett; Graphics by Ritvik Carvalho; Editing by Jeremy Gaunt)