Scottish Referendum in 100 Days and Counting

Marc To Market's picture

The Scottish referendum will be held in 100 days, on September 18. The referendum is fundamentally as different from the referendum in Crimea, or the one proposed by Spain's Catalonia as a prize fight is different from a bar room brawl. The former is conducted within established guidelines that govern such activity. The latter is not.

The question before Scotland is an exercise in clarity and simplicity. " Should Scotland be an independent country?" There is little scope for confusion. There is not threshold in terms of turnout that is required. The one innovation was to lower the minimum voting age for the referendum to 16 from 18.

If lowering the minimum voting age was meant to bolster the "yes" vote, it does not appear to be working. Polls have fairly consistently shown the "no" camp ahead. However, the debate is likely to become more passionate as the date draws near.

A "yes" vote would obviously have more impact than a "no" vote. If Scotland did vote in favor of independence, there would be about an 18-month period of preparation and serious negotiations with the UK. On key macroeconomic measures, like population and GDP, Scotland is 8-9% of the UK. The critical negotiations will be over how much of the UK's debt should Scotland finance as the UK will remain responsible for it all. Related to this, but separate is the currency that Scotland would use.

If Scotland commits to financing the share of debt in line with its relative GDP or population, a new independent Scotland may find itself with a debt burden of close to 100% of GDP. Moreover, its deficit may be on the magnitude of 10% of GDP. If Scotland refuses to compensate the UK, its own creditworthiness will likely be questioned. If may also weigh on the UK's rating.

The UK government has tried to play hardball, arguing that an independent Scotland could not use the pound as its currency. Scotland can still do so, via a currency board or a new Scottish currency that could be pegged to the pound. Such a currency regime, which is the least disruptive, also curtails the very independence Scotland ostensibly seeks.

Arguably Scotland's independent drive is a function of at least a couple of forces. First, Scotland has been pushing for greater local rule since 1997. Since 1999, some central government activities, such as education, transportation and health, have been transferred to Scotland in what has been called devolution. Second, the rise of the Scottish National Party, which won a parliamentary majority in 2011, should be also understood within the context of the political push back against austerity, seen recently in some of the EU parliamentary races. The SNP had campaigned for greater home-rule, in areas such as pensions and passports.

There may be some knock-on implications for the UK general election next May, eight months after the Scottish referendum. A victory of the "yes" camp in Scotland and the "loss" of Scotland would likely become key campaign issue. Even if an independent Scotland can be laid at the feet of the Conservatives, the loss of Scottish MPs would be a blow for Labour. It seems ironic, with the apparent increasing support for the UKIP and a faction of the Conservatives that want to ally with Germany's AfD (anti-EU party), it is rejected the kind of federalism on the European level that it claims to want Scotland to accept on the national level.

In a larger sense, the Scottish referendum is only one several considerations that we expect will boost sterling volatility in the coming months. The three-month implied volatility is just above 5.0%. It is at the lower end of where it had traded since at least mid-1996, when Bloomberg began collected the data. The 10-year average is closer to 9.5%, to put it in perspective.

In addition to the Scottish referendum, there are significant personnel changes at the Bank of England's Monetary Policy Committee, which in the past has been associated with an increase in volatility. Meanwhile, another part of the BOE may seek to impose new macro prudential measures to check the price of houses in the UK, that are rising particularly quickly in the south, including London. On top of this, a hawkish faction at the MPC appears to be coalescing, which may lead to increased speculation of a rate hike in Q1 15, ahead of the May national election.

The correlation between sterling and implied volatility (3-month implied) has turned positive (at the level of percent changes) on a 60-day rolling basis since late April for the first time since 2007.  However,  we suspect that the risk of higher volatility will coincide with sterling declining. For medium term investors who want to hedge their sterling exposure with options, may consider buying puts as opposed to the cheaper and more conservative strategy of covered rights.

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falconflight's picture

I'd vote for independence in a heart best, there and here.  Too bad that the revolutionary concepts embodied within the Constitution are all but dead.  

theprofromdover's picture

So where are the barricades they want to be storming?

Where are the marching masses, demanding to be free?

This is not an independence movement, this is some oily politician's idea of keeping control.

The independence-minded want to keep the UK currency, and stick with the Bank of England?

What sort of independence is that?

Left wing Scottish politicians want a massive public sector, and total government control of everything. They will bankrupt the country within a decade.

Scotland should be independent, with a small government, its own currency, no central bank. It should tell London that RBS is not Scotland's problem, it was nationalised by a London government. It should write its own constitution to protect its citizens, and undertake to simplify the tax system into 500 pages, and repeal 70% of all the UK laws passed in the previous 50 years.

Scotland needs an outsider, tearing up the Edinburgh legal/financial axis and the Glasgow Trades Union behemoth.

An entire Scottish government could be run by 20 full-time staff, we are only talking about a national population of 5 million!

Seize Mars's picture

If they are "free" from the Union, will they be forced to use fiat money? Will they pay income tax?


goldhedge's picture



AdvancingTime's picture

An event in the not to distant future that may effect the British currency is when voters in Scotland will be given the choice of opting for independence in a referendum in September 2014. This is something much of the world has yet to weigh in on. A separate Scotland has three options, unilaterally keeping the pound, creating a Scottish currency or joining the euro. All of these alternative currency arrangements depend on the rest of the UK agreeing to the union and terms, an independent Scottish state might have to accept "significant policy constraints" under such a pact.

Many reasons exist for maintaining a "Sterling Zone," The Scottish government said a currency union would be in everyone's interests economically and benefit both Scotland and the rest of the UK, but the 58 million citizens of the UK will be in no hurry to give away any of their sovereignty over monetary and potentially other economic policy to five million people in another state. More on the issuses facing an independent Scotland in the article below.

Herodotus's picture

Who is the rightful heir to the Scottish throne?  Will the Stuarts be restored to the throne?  It is my understanding that the current heir is a German Bavarian Prince or Duke of the Wittelsbach family.  Is that true?

Ghordius's picture

nah, Scotland has a Queen, and I don't think anything will change, there

ebear's picture

Small nations tend to be exploited by large nations.  Small means a smaller economic base, thus less flexibility in economic, fiscal and social policy, more dependancy on outside financing and a potentially destructive demgraphic trend as young educated people move away seeking better opportunities abroad.   That's not even considering the disaster that can befall a small nation when its political and financial elites decide to run things for their own benefit to the detriment of everyone else, such as happened in Iceland.

Legitimate grievances aside, most of these independence movements look like small groups of opportunistic elites using emotional arguments to drive the sheep into a smaller, more easily contrrolled pen, to the benefit of said elites and nobody else.

You want a good example, look at Quebec.  The near miss the last time they held a referendum set the stage for the decline of Montreal as a center of world trade and finance.  Most of that moved to Toronto along with the skills and the tax revenue it generated.  In a full independence scenario the remaining English and intelligent Francophones will leave and Quebec willl be an even worse basket case than it already is, with only the USA to bail them out.

Same thing will happen if Scotland separates.  People with capital and marketable skills will leave, the tax base will shrink, and the general standard of living will decilne, after which foreign capital will come in and drive the usual hard bargain for cheap labor and low corporate taxes.  Fact, if I was conspiracy minded, I'd say that was the plan all along.

goldsansstandard's picture

What about Singapore, Hong Kong, Dubai, Switzerland? A free Scotland could join those ranks, but for the commies.

ebear's picture

OK, I'll bite:


1. Singapore: More of a city-state than a nation.  Japan just walked in and took over in WWII.  Nothing they could do about it.

2. Hong Kong:  Never was a nation.  Chinese territory annexed by Britian, now under Chinese rule.  A model of ChiCom exploitation.  Express an unpopular political opinion there and see what happens.

3. Dubai.  Sits on huge oil reserves, protected (some might say exploited) by USA.

4. Switzerland - Protected by mountains and heavily fortified.  Also protected by bank secrecy laws - ie. safe haven for dirty money which bought them some protection, until recently when pressured by USA to reveal accounts.  Banking havens, especially the offshore kind such as Caymans, Sechelles, Vauatu etc are all exploited in the sense they hide other people's dirty money in exchange for their quasi-independence.

Now for my list:

Every nation in Central America with the possible exception of Costa Rica.  Most Carribean nations, just about every nation in Africa, the Himilayan nations, most now annexed, Most South American nations, with the possible exception of Brazil.

Then there's Latvia, Estonia, Lithuania and some of the recently independent "stans"  If they aren't exploited by either Germany, USA or Russia, I don't know who is.


I "get" the small is beautiful meme, I just don't think it works in the real world, and I believe I've presented enough examples to make my case.  It sucks, but shooting the messenger (down votes) doesn't change a thing.


Ghordius's picture

"Small nations tend to be exploited by large nations"

Mr. Juncker, the former PM of Luxembourg, a tiny nation in europe, would point out that one of the implied reasons for the EU is to give small countries the way of *not* being exploited by large nations

he is the designated ("lead candidate") of the EPP, the biggest conservative parliamentary group in the freshly elected EU Parliament, and he is busy claiming the next EU Commission's lead role from the national governments (aka EU Council)

mostly known in ZH for making very caustic remarks which pander to (and are well liked by) his conservative base, for example: "If necessary, I lie", or "yes, some sovereignty will be lost by that"

though as often, what goes down well with european conservative continentals... is anathema for the Anglophone press. a cultural chasm, that one

jefferson32's picture

Wealthiest nations are smaller ones. See Switzerland. See Singapore, Hong Kong. See ZH article today about millionaire households. A government that rules over a large swath of population is by definition more powerful. And since power corrupts, large countries tend to be poorer. cqfd.

ebear's picture

"Wealthiest nations are smaller ones"

Guyana, Surinam, Honduras, Nicaragua, Guatemala, Belize, El Salvador, Cuba, Haiti, Dominican Rep., Nepal, Bhutan, Ecuador, Paraguay, Bolivia....

Off the top of my head.

Shall I continue?

ebear's picture

Almost forgot:  ICELAND.  

walküre's picture

It's no secret that the fat sows only leave the trough when they've completely licked it dry. Those fat sows have no loyalty or allegiances and will always go on to the next trough to feast on. A nation cannot survive the obscene gorging forever. Eventually the fattest sows need to get slaughtered to make room for the starving piggies. Good riddance.

Unfortunately Scotland hasn't produced another Robert the Bruce yet to clean out the stalls.

ebear's picture

"Eventually the fattest sows need to get slaughtered to make room for the starving piggies"

So they can become the new fat sows, and the cycle repeats.

Oh, but it's different this time, right?

walküre's picture

Such is life it seems. Is there a chance that mankind could ever progress, evolve, grow, learn beyond this behaviour? I don't know. As long as the old paradigms are in place and human nature accepts to be driven by instincts, there's no escape from the cycle I'm afraid.

Native American culture had actually established a form of peaceful collective that trived in its environment. My prediction is that we may return to that standard of living when oil runs out and a vast majority of the population is simply starved or frozen to death. Don't think it cannot happen.

Ghordius's picture

excellent summary

- "Germany's AfD (anti-EU party)" actually not anti-EU, more focused against the EUR, and mildly skeptical yet still EU committed

- Note that Scotland is way more EU-friendly than rUK. not exactly federalist, yet definitely in the pro-EU camp

- Note how much Obama is for a no vote. Scottish nationalists are quite pissed about his verbal intervention, noting that the US achieved independence from the UK, too...

walküre's picture

My wife and I love Scotland, even during the winter. Scotland has something that captured my German soul as a kid. No, it wasn't Nessie. Always found the Scottish to be friendly and very respectful. Honest and straightforward, no nonsense or lying scumbags as opposed to the South.

I'm looking for a good, safe, well run and English speaking place to hang my hat for good. An independent Scotland may be just that place!

kchrisc's picture

They can be free only if they agree to have a Rothschild owned central bank. Therefore they can never be free.

medium giraffe's picture

Come on Scotland! I know it's all 'roaming in the gloaming' and all that misty eyed nationalist bullshit.  I know you don't feel represented in government (newsflash: there are no brits that feel this way), but we're better off together.  You'll have to pay for your own currency, embassies etc etc, and lets face it, Scotland's economy isn't exactly stellar.  And if you think you'll be walking away from a mountainous debt pile without taking one up the ass.... well.... those shitbags in London will have your kilts up on the way out, I'm pretty damned sure. 

Ever wonder who might end up holding the bag for Royal Bank of Scotland?

Jings crivvens & help ma boab, dinnae dae it, dafties!

(but if you do, make sure you get 1. A constitution, and 2. No central bank!)


Best Wishes, Some English Bastard.

wattie's picture

Classic, I'm no fan of independence (Scottish with an English mother) but it does make you wonder. After all, how long would it take Scotland to accumulate 18 TRILLION of debt ( forgetting all that other stuff). That makes us considerably richer than the US.
Cheers Wattie

walküre's picture

If you're referring to the US debt at 18 trillion, then you'd have to put the size of the population in perspective. UK debt is roughly 1.3 trillion.

What about the offshore oil wealth? Who owns that?


kurt's picture

As part Scot from the Isle of Harris whose ancestor was kicked off his land by English Lords, forced to work in a seaport and ultimately made it all the way to Wisconsin where he homesteaded, I can attest that we are easily "stirred up" and that's how we've been manipulated into fighting for every illuminati asshole war. This independence vote is, no doubt, another form of "clearing". We just haven't seen the entrails. Like the TPP and Nafta and every other Red Shield scheme, this will not turn out right for the common man. Beware. 

teslaberry's picture

the only good reason for scotland to be independent from the UK is to DEFAULT UPON ITS DEBT. 



CCanuck's picture

Slaves try to buy their freedom all through history, still do.

Asians, paying criminals to boat them here, or women selling their bodies to escape eastern europe, etc...then the illusion is over.

They get here to find they are still slaves, only now with slightly better living conditions and the hope of change..but still slaves.

Just say'n your statement is not so absolute.

I do agree independence includes default and a fresh start, free from the current central bank slave masters.

NoWayJose's picture

When William Wallace yelled 'Freedom' was he talking about freedom from the English, or freedom from the bankers?

NoWayJose's picture

The author is correct in that the debt is the issue. However, who gets to play hardball with whom? The country that owes the debt or the country that holds the debt? What can the UK do if Scotland says - we don't want any debt? Scotland then introduces its own currency - not pegged - and is essentially a debt free 'modern' country with its own currency. The key at that point is to live within your means, balance your budget every year, and keep the big banks out! Then they won't need any credit. Radical stuff...

Winston Churchill's picture

They already have their own currency, have for centuries.

Please get you facts straight.

Its the death knell for New Labour if they go, the most left wing socialist crazies

hold Scottish seats.

Scotland would sink into socialism/marxism within years.

Winston Churchill's picture

Never spent any time in Scotland have you ?

I used to visit Glasgow quite often.My brother ,and his family lived there.

Only time I've had a car head butted by a pedestrian.Poor guy was given the bums rush

from a pub.

Not at all like Scandinavians.

overmedicatedundersexed's picture

movement toward small independent nation states is poison to the NWO, so the vote will go as planned, hope I am wrong, as many on ZH understand gigantic central gov's can only rule by force and dictatorship- freedom then dies

BeetleBailey's picture

The debut....OF THE SCOTTIE!

Whatever Sean Connery says...

Fuck the Brits!

Miles Ahead's picture

... ah, English?  Because Scottish are Brits.

BeetleBailey's picture

No lad....the Brits are twits...the Scots are wankers that got took over by the twits...

Ewan McGregor explains....

All is chosen's picture

5.19 million souls of all ages divided into RBS's £100 billion.

Me thinks if us Scots say 'No', the rest of the UK should have the right to vote. 

The last poll showed 79% in favour of a kick from a large boot; & who could blame them

CCanuck's picture

Do you believe the avgerage Scot had anything to do with RBS's -100 billion balance sheet?

RaceToTheBottom's picture

The same things were warned about Slovakia, and now they are the productive one and the Czechs are languishing....

I think the main thing is they need to get finances under control and find business relationships other than UK, both at day one.

They are already genetically predisposed to being tightwads.

QQQBall's picture

we Scots are frugal. the fooking Dutch are cheapskates

BeetleBailey's picture

the Dutch are soggier....drink...watered down....cities...fucked up by canals...


IndyPat's picture

And they have Dutch accents. Isn't that veird?

BeetleBailey's picture

yeah...but Czech women....are...HOT

Miles Ahead's picture

rotf... I was thinking that before I saw your comment... and would have been too hesitant. +1

Dingleberry's picture

They also have a genetic disposition to the dole from what I have read.

This is why the ref won't pass. They aren't stupid.



Miles Ahead's picture

So Dinglebat, you read this about Scots.  And now are confident enough to pass it along.  A genetic disposition to the dole.  Yeah, they aren't stupid.  Now you... the jury is still out.

Dingleberry's picture

It was a joke.

Anyway, sorry to offend your liberal and enlightened sensibilities.

Now go get your welfare check.

TrulyStupid's picture

Hit the fookin enter key twice..Grrreat

TrulyStupid's picture

The Rolling Stones say "hey hey you you get of a my cloud"

A scotsman says : " Hey Hey Mcleod, Get off of my ewe."

rubiconsolutions's picture

As long it doesn't affect my ability to get haggis and quality single malt whisky I don't really care what they do.