Spain's benchmark index, the Ibex 35, slumped nearly 3% following its worst day of trading since the Brexit vote last June. Spain's 10-year risk premium -- the differential between the yield on its 10-year bonds and the yield on Germany's 10-year bonds -- soared to 129 basis points. And that's despite the fact that the ECB continues to buy Spanish debt hand over fist.

But it is the banks that have borne the brunt of the pain this week. On Monday, the first trading day after the independence referendum, they lost €4.84 billion in market value. Over the past five trading days, shares of the two biggest Catalan-based banks, Caixabank and Banco de Sabadell, have plunged respectively, 9% and 13%.


In Brussels today the first Vice-President of the European Commission, Frans Timmermans, categorically ruled out the possibility of the EU playing a mediating role in the dispute. He also defended Rajoy's use of rough justice on Sunday, arguing that every government has an obligation to uphold the rule of law and (pay close attention, EU citizens) "that can sometimes require the proportional use of force."


Both sides in this conflict are poised on the point of no return. Unless they can be pulled back from the brink, the next step that either side takes will bring the State institutions of Spain into direct confrontation with those of Catalonia. Once that happens, Spain's political system and economy will be in uncharted territory, and the jitters we've seen in recent days could quickly give way to panic.


If things spiral that far, Spain's financial system will face its biggest test since 2012, the year that Bankia collapsed and Spain's risk premium reached a staggering 630 basis points. And if the recent collapse of its sixth biggest bank, Banco Popular, just four months ago is any indication, it could have serious difficulty weathering the sort of disruption that appears to be on its way.

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