Scotland leaving the UK, Yes or No for the pound?

First Minister Alex Salmond vehemently declared that the ‘current 300 year union  between Scotland and the UK was no longer fit for purpose, and that an independent Scotland, with its oil wealth would be one of the world’s richest countries’

He also urged Scotland to ‘take charge of its own destiny and free itself from the shackles of a London based UK parliament’ The prospect of Scotland dispersing from the UK has become a real possibility and has those within Westminster running scared.

September 18^th sees the day of reckoning for Alex Salmond and his unwavering desire for Scotland to free itself from the shackles of the United Kingdom. The implications of Scotland’s potential departure from the UK has prompted much speculation on the ramifications of a ‘Yes’ vote on the 18^th of September. Amidst the uncertainty surrounding the upcoming referendum, the pound hit a new seven month low against the dollar on the 3^rd of September 2014 with the pound limping in at £1/$1.63.

Goldman Sachs economist Kevin Daly stressed that the threat of Scotland gaining independence would provide investors with ammunition to sell Scottish-based assets and also withdraw deposits from Scottish-based banks. The implications of such a move could prove to be ‘severely negative’ and lead to further declines in the value of the £. The prospect of a ‘Yes’ vote would prompt a further decline in the value of the £ due to high levels of uncertainty and ultimately cause a depreciation in the value of the £ due to supply increases of the currency.

The recent drastic increase in the prospect of a ‘Yes’ vote has prompted significant market uncertainty with You-Gov indicating that ‘Yes’ votes are narrowly in front with 51% in comparison to ‘No’ votes with 49%. The volatile shifts towards the ‘Yes’ camp has drawn attention to the issues surrounding the sharing of debt and currency arrangements. John O’Groats claims that the impact on the pound of a ‘Yes’ vote would be ‘swift, merciless, and potentially cataclysmic.’

Scotland makes up approximately 8% of Britain’s GDP and the relentless pursuit of full ownership of oil rights could prove disastrous for the pound. Britain’s dependency on energy imports is currently at its highest levels since 1975, which means that losing the supply of oil revenue from Scotland would prove costly for the UK’s balance of payment deficit.  The chain of events which could see a rapid depreciation in the value of pound and Scotland failing to take their share of the UK’s national debt would potentially lead to an increase in the cost of food, and possibly taxation.

Bill O’Neil of UBS suggests that ‘independence will eventually be rejected, but with the ‘Yes’ side winning a share of over 40%.’ He also goes on to say that ‘there will be a modestly positive reaction for the pound, UK government bonds and stocks in the aftermath of the referendum.’

Conversely in July 2014, Kathleen Brooks of Forex stated that ‘if the sterling is still around its present $1.70 against the dollar at the time of the referendum, a yes vote could send it plunging to $1.60 within a few hours.’ The manner in which recent events have unravelled in September 2014 sees the pound currently at £1.63/$1 due to a rise in ‘Yes’ votes which correlates closely with the thoughts of  Brooks.

The plummeting in the value of the sterling is the latest piece in the ongoing saga which has seen David Cameron describe Alex Salmond’s threat not to accept a share of the UK’s national debt as ‘chilling’ and ‘reckless’ The prospect of Alex Salmond choosing to renege on Scotland taking on its share of national debt, if Scotland is not allowed to continue with the pound is of great magnitude. David Cameron argues that this will lead to ‘much, much higher mortgage rates, and crippling interest rates for businesses’

The departure from the UK for Scotland would require Scotland to form either a) an informal or formal union with sterling b) a separate Scottish currency or c) an informal or formal union with the euro.  The Scottish government have expressed their desire to retain their use of the pound in the event of a ‘Yes’ vote.

The Conservative, Liberal Democrats and Labour have shown a rare sign of unity by declaring that an independent Scotland will not be able to continue using the pound.

It remains to be seen whether Scotland will emerge from the shadows of the UK and just how significant a ‘Yes’ vote on September 18^th would prove to be for the UK and beyond.