Sterling Braces for Scot Referendum by Ashraf Laidi (@ALaidi)
Scotland’s 32 voting areas begin announcing the results of the referendum on Scottish independence at around 2am - 6am BST(London), with Aberdeen and Edinburgh expected to start revealing the results around 6 am. All but one of the major polls on the Scottish Referendum have shown a majority for the ‘No’ camp rejecting independence. Bookmakers are pricing only a 25%-28% chance for a Scotland ‘Yes’ vote. Such high probability for a ‘No’ may imply a short-lived rally in GBP once the ‘No’ is final.
In the unlikely event that Scotland votes ‘Yes’, sterling will be adopted by the Scots despite opposition from the Bank of England. There is no other way. Asking how an independent Scotland will fare with the pound without a lender of last resort is the tricky part, especially as it would have to maintain sufficient currency reserves to meet its obligations as a new state.
EU-Scotland is far from a sure thing
In order for Scotland to be able to adopt the euro it would require acceptance by each of the 28 members of the European Union. Will each member accept a country that has just refused to repay its debt portion when it was an EU member? Although European Commissioner Juncker said EU would not take any new members and “consolidate what has been achievd among the existing 28” nations, Brussels officials sought to calm nervousness in Scotland by explaining that Juncker was referring to new entrants from the Balkans and that Scotland was a “special case”. Juncker’s predecessor, Barroso, said it would be “v difficult if not impossible” to secure entry from all 28 members.
No “buy on the news” rally in GBP after a “Yes” vote
Those expecting he pound to would end up rallying in the event of a ‘Yes’ on the basis of “sell of the rumour buy the fact” ought not to think twice. A “yes” vote would be a shock to say the least, and a resulting sterling plunge is inevitable due to:
i) uncertainty of Scotland’s paying of its union-debts may force the BoE to guarantee Scottish debt;
ii) loss of oil revenues to England;
iii) doubts over England’s path towards fiscal rectitude;
iv) eroding chances of a 2015 rate hike from the BoE;
v) political uncertainty in Westminster ahead of May 2015 elections and in the period following Scotland’s actual independence, likely in 2017
vi) Uncertainty over UK nuclear security if Scotland shuts down missiles and submarines in the river Clyde.
Yet, an any damage from a plunging sterling would be allayed in the long run by a boost to England as a place of business as Scottish banks and financial services firms seek refuge to the certainty of London. Scotland’s exit from the Union could be seen to relieving the UK Treasury of public finance burden to Scotland.
