King Felipe Lays Down Law to Catalonia as Rajoy Seeks Allies

(Bloomberg) -- King Felipe VI told Catalan separatists trying to break up his country that their “unacceptable disloyalty” has no place in any democratic state, as he vowed to keep Spain together.

In a televised address to the nation Tuesday evening, Felipe said the regional government has sown division among its own people with its repeated and deliberate violations of Spanish law, and put the economic well-being and social harmony of the whole country at risk.

“They have shown an unacceptable disloyalty toward the power of the state,” Felipe said. “Today Catalan society is fractured, set against itself.”

Prime Minister Mariano Rajoy is fighting to maintain control after 2.3 million Catalans defied both the central government and the Constitutional Court to cast ballots in a makeshift referendum on independence. Regional police ignored orders to shut down the vote on Sunday. For Felipe, the crisis may be a defining moment of his three-year reign, like the attempted coup which sought to topple his father's nascent democracy in 1981.

“Certain officials in Catalonia have repeatedly, consciously and purposefully breached the constitution,” Felipe said, speaking from a desk with a laptop to his side and the Spanish and European Union flags behind him.

Seeking Support

Rajoy, who heads a minority government, is struggling to find the political support he wants for an unprecedented move against the separatists, and the king's intervention may help sway the doubters. He made no reference to Sunday's violence or to voters who were injured during the crackdown.

The main opposition Socialists are reluctant to share responsibility for any plan to push out the Catalan leadership, after seeing the prime minister bungle Sunday's crackdown.

Catalan President Carles Puigdemont has promised a formal announcement to regional lawmakers of the referendum results, triggering a 48-hour countdown to a unilateral declaration of independence. He told the BBC in an interview his government would act at the end of this week or the beginning of next.

Spain's benchmark IBEX 35 stock fell as much as 1 percent before staging a late surge and erasing the losses on signs neither side was going to take a leap into the unknown.

‘Muddling Through'

For some, such as Natixis strategist Sylvain Goyon, that means it's time to go overweight. The crisis has largely been priced in and political risk will likely keep dropping, he said, adding he expects an eventual negotiated settlement.

“In a way the king is playing his part and trying to act like his father at the time of the coup, when he told troops to go back to the barracks. He has to be firm,” Goyon said. “Muddling through is the most likely scenario. Spain is probably not going to fall apart.”

Some 700,000 demonstrators flooded the streets of Barcelona on Tuesday to express their outrage at the crackdown by Spanish police, according to local officials. Protesters surrounded police vehicles and blocked access to central-government buildings, but there was none of the violence that shocked observers around the world on Sunday. Jaume Balmes High School in Barcelona, a focus of the police raids, was festooned with flowers.

For the first time since the vote, neither Rajoy nor Puigdemont appeared in public, leaving the stage to the monarch.

Parliament Divided

Tensions between the rival police forces operating in Catalonia are another source of concern for Rajoy as he considers suspending Catalan self-government under Article 155 of Spain's constitution. Catalan officers ignored his orders to shut down the vote and even got into scuffles with the National Police.

“It's unclear at this stage whether the government will use Article 155,” said Fernando Simon, a professor of constitutional law at the University of Navarra. “It has all the legal arguments, but there has been a de-escalation, at least in tone, from the government and Catalan administration.”

As for Puigdemont, he's on the edge of a precipice.

The European Commission has rejected his invitation to step in and mediate, and made it clear that an independent Catalonia would be outside the EU and its financial system would be shut off from European Central Bank funding. Spanish Economy Minister Luis de Guindos has warned that a breakaway could wipe out 30 percent of Catalonia's economic output.

Calls for Dialogue

A spokesman for the regional government had no guidance Tuesday night on when Puigdemont might go to the regional assembly and start the next phase of the process. Rajoy himself will appear before the national parliament to give an account of the situation, but not until next week.

Edouard Philippe, the prime minister of Spain's closest ally, France, on Tuesday urged both parties to seek a negotiated settlement. That sentiment was echoed by business leaders in the rebel region, as biotech firm Oryzon Genomics SA announced it's moving headquarters to Madrid from Barcelona.

“We have to have the common sense to get a dialogue going again,” Jose Luis Bonet Ferrer, chairman of Catalan winemaker Freixenet and head of the Spanish Chamber of Commerce, said in an interview in Madrid. "Like all Catalan businesses, we're very worried about what's happening -- many things could occur that we can barely even imagine.”

--With assistance from Andrew J. Barden Esteban Duarte Todd White Thomas Gualtieri Maria Tadeo and Katie Linsell

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net.

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Andrew J. Barden