Despite the uncertainty amongst the public at large, the investment community appears to have taken an unshakable stance that, once the ballots are collected and counted, the result will be a clear and undisputed win for the "better together" camp.
Whether this stance proves to be unwarranted remains to be seen, but what is surprising is the extent to which little has been factored in for that outside chance that Mr Salmond fulfils what he considers to be the destiny of the Scottish nation.
It is against this backdrop that Kevin Doran, CIO of Brown Shipley, takes a look at some of the ramifications of a "yes" vote and the effect it could have on markets on Friday 19th September.
Let's deal with the big one issue – currency. Whether posturing or not by the various camps, there is nothing at all to prevent the Scottish using sterling as an official currency in the event of a ‘yes’ vote. Whether they use it as an exclusive currency is another debate, but sterling could remain in circulation and used North of the border whether the English sanctioned it or not.
This is where it becomes interesting. With an English blessing, and a completely autonomous Scottish Government, this would effectively mark the birth of a new currency union; a strange choice given the historical failures in this arena. As we have said on numerous occasions, for currency union to have any chance of success, it must be buttressed with the trinity of political, fiscal and legal union – with banking union also nice to have.
Without these in place, it would be only a matter of time before the Scottish would be forced to either abandon their desire to use sterling or harmonise its political and fiscal decisions with those of the English; which kind of defeats the purpose of the referendum in the first place. This is, in a roundabout way, the message delivered by Mark Carney on his trip to Edinburgh in January.
Without the blessing of the English, should sterling remain the currency du jour, this would require a Scottish currency to be created and a peg system to be maintained. That is not to say that the newly created Scottish currency would be in circulation, but an exchange rate would be put in place, with the new Bank of Scotland being tasked with using its foreign currency reserves to maintain the peg in much the same way the Bank of England was required to maintain the UK's position with the Exchange Rate Mechanism (ERM).
Needless to say, the experiment would reach the same conclusion, with the Scots witnessing their very own Black Monday, Tuesday or Wednesday somewhere along the way.
Which brings us to the alternative of a newly formed Scottish currency, backed by the Bank of Scotland and in free circulation. On day one, the exchange rate would be, of course, one for one, but over time who knows? We should consider the associated risks and tribulations that would bring to a world in which transactions across the border have long been without any friction at all.
My view is that when faced with such an outcome, businesses (and indeed families) on both sides of the border would need to consider whether they would be best placed located north or south of Gretna. To ‘help’ businesses and people with the decision, the two governments would most likely engage in a bidding war of rebates, incentives and tax breaks designed to keep jobs and taxes on their side of the divide.
The result would almost certainly be a drop in tax revenues, which – other things being equal – creates an even larger budget deficit than that faced currently. Leading to credit rating downgrades, higher borrowing costs and the risk of a debt spiral, it is this feature of a ‘yes’ vote that most aptly displays the market's current nonchalance towards the subject. A market pushing Gilt yields to near historic lows. A market unconcerned about the UK's credit rating. A market apathetic to a Scottish credit rating of perhaps ‘A+’ at best and the consequent impact on all Scotland-based institutions now under a lower sovereign ceiling. For an industry whose role in society is to correctly price for risk, investors are in danger of ploughing on with the devolution question firmly in their blind spot.
The views expressed here are those of the author and might not represent those of Brown Shipley.
