Spain plans response to Catalan independence move

The Spanish cabinet was meeting on Wednesday to decide its responsetoCatalanmoves to declareindependence, but the prospect of dialogue to ease Spain's worst political crisis in four decades already seemed remote.

The fraught situation became even more confused on Tuesday night whenCatalanleader Carles Puigdemont made a symbolic declaration ofindependencefromSpainbut then immediately suspended it to allow for talks with the Madrid government.

Such a declaration had been widely expected after theCatalangovernment said 90 percent of Catalans voted for a breakaway in an Oct. 1 referendum thatSpainhad declared illegal and which most opponents ofindependenceboycotted.

ButSpainresponded angrily to Puigdemont's speech, saying theCatalangovernment could not act on the results of the referendum.

"Neither Mr Puigdemont nor anyone else can claim, without returning to legality and democracy, to impose mediation dialogue between Democrats takes place within the law," Deputy Prime Minister Soraya Saenz de Santamaria said on Tuesday.

Prime Minister Mariano Rajoy spoke to other political parties on Tuesday to seek the greatest possible support for the government'sresponse.

Puigdemont's speech also disappointed supporters ofindependence, thousands of whom watched proceedings on giant screens outside parliament before sadly leaving for home.

Financial markets, however, were encouraged that an immediate declaration ofindependence had been avoided.

Although Puigdemont's climbdown appeared to lessen the immediate risk of a head-on confrontation between theCatalanand Madrid governments, Spanish media said it was still possible Rajoy could take strong measures, including possibly suspending Catalonia's autonomy and forcing new regional elections.

TheCatalangovernment said if Madrid invoked this option, using Article 155 of the Spanish constitution, it would press ahead withindependence.

"If the government implements 155, it means there is no willingness for dialogue...and so obviously we would have to be consistent with our commitment to the people of Catalonia," Catalangovernment spokesman Jordi Turull told Catalunya Radio.

"We have given up absolutely nothing. We have taken a timeout which doesn't mean a step backwards, or a renunciation or anything like that," he said.

MARKET RELIEF

Following Puigdemont's speech,Spain's benchmark IBEX share index rose as much as 1.6 per cent, outperforming the pan-European STOXX 600 index. The rally pushed the main world stocks index, the MSCI's 47-country 'All-World' index, to a record high.

Spain's 10-year government bond yield -- whichmoves inversely to the price -- dropped 5 basis points to 1.65 per cent in early trade, according to Tradeweb data.

But some analysts said Puigdemont's stance would prolong the uncertainty and risk from the Catalanimpasse.

It could also rock hisCatalangovernment, with one far-left party inside his coalition, the pro-independenceCUP (the Popular Unity Candidacy), saying he may have missed a historic opportunity. It gave him one month to find a negotiated solution the CUP doubts will ever come.

"You say we are suspending the effects because we are going to negotiation and mediation. Negotiation and mediation with whom? With a Spanish state that continues to harass and persecute us?" CUP leader Anna Gabriel said.

Thousands ofindependencesupporters, flyingCatalanseparatist flags, had gathered in a party atmosphere to watch Puigdemont's speech on big screens near the 18th-century parliament building, eagerly expecting a declaration ofindependence.

But their hopes were dashed, leaving some in the crowd in tears, whistling or shaking their heads.

"I am disappointed. I hoped for a declaration ofindependenceand it didn't happen," said 18-year-old student Julia Lluch, among a crowd ofindependencesupporters who were rolling up their flags and drifting away from the assembly.

In Brussels, there was relief that the euro zone's fourth-largest economy now had at least bought some time to deal with a crisis that was still far from over.

One EU official said Puigdemont "seems to have listened to advice not to do something irreversible".

Both Rajoy's government and European Council President Donald Tusk had urged Puigdemont not to proclaimindependence.

TheCatalancrisis has deeply divided the northeastern region itself as well as the Spanish nation. Opinion polls conducted before the vote suggested a minority of about 40 percent of residents in Catalonia backedindependence.

The stakes are high -- losing Catalonia, which has its own language and culture, would deprive Spainof a fifth of its economic output and more than a quarter of exports.

Some of Catalonia's largest companies havemoved their head offices out of the region and others were set to follow if he had declaredindependence.