Update: This replaces the version published on 22 october, correcting the percentage of
total population column in figure 2.
Markets appear calm about recent political developments in ¢atalonia, viewing the likelihood of the region gaining independence from spain as remote. fie believe markets are overly complacent about this risk, as the likelihood of independence is non-negligible (Figure 1), and the economic costs of such a scenario would be significant for Catalonia, Spain, and Europe. With the recent increase in risk aversion, downside risks to european growth and adverse debt dynamics, we think that independence risks have the potential to trigger further volatility.