- A Yes vote would create great uncertainty about the future of the Scottish financial system.
- Both a new currency and sterlingisation are very risky.
- The shock could be immediate.
Thursday, September 4, 2014
Financial Implications Of A Scottish Yes Vote
I don’t want to discuss the long-term issues such as viability or governance. I’d prefer to focus now on the short-term risks. Goldman Sachs has just published a paper on the short-term risks of a Yes vote. Among other risks, it discusses the adverse implications for Scottish assets and Scottish banks:
Douglas Flint, chairman of HSBC, recently wrote in the Telegraph that “At the extreme, uncertainty over the Scotland’s currency arrangements could prompt capital flight from the country, leaving its financial system in a parlous state.”
So if you’re looking for something to worry about,, you should worry about the immediate future of the Scottish financial system. Yes, maybe the UK will relent and agree to monetary union. But right now, the risk is not that the monetary union will break up, but that it might. The UK has said that monetary union is off the table, and the EU has said that Scotland must have its own central bank. Remember that the EU wants to discourage regional secession from its member states. Almost every country in Europe has a region that seeks greater autonomy-- or worse. Scotland will have no friends in Brussels or Frankfurt.
Whether Scotland decides to print its own money, or whether it decides to unilaterally adopt sterling, there are substantial risks to holders and issuers of Scottish financial assets. If Scotland decides to print its own money, the currency will be entirely novel, and Scottish monetary and fiscal policy are complete unknowns. If Scotland instead decides to unilaterally “sterlingise”, its banks will lack a lender of last resort. In either case, there are substantial risks. A Yes vote would create great uncertainty for a very long time.
In addition, the rump UK’s credit would suffer if Scotland chose to repudiate its debt, which has been discussed. This would leave the UK with a higher debt-to-GDP ratio, since the UK can’t repudiate its own debt. Every pound of UK debt is a liability of HM Treasury.