Scottish Independence 'Yes' Vote Is A "High Risk" Event, Citi Warns

Tyler Durden's picture

A "Yes" vote for Scottish independence represents a "high risk" event according to Citi's Michael Saunders. With the so-called 'neverendum' now less than a month away, Citi continues to highlight three particular concerns if Scotland does vote for independence: Scotland’s relatively weak fiscal position, Scotland’s large banking system and uncertainties over the currency arrangements of an independent Scotland. The Scottish Government seems to be seeking a policy of "sterlingisation" - which even their economic advisors judge "is not likely to be a long-term solution." For now a "no" vote is most likely, however, even if the Scottish referendum does not pass, the UK political landscape is likely to remain in a state of flux.


Via Citi,

The referendum on Scottish independence will be held on September 18 this year, with a simple Yes/No vote on the question “Should Scotland be an independent country?” A simple majority of eligible votes will suffice to win. All parties involved have agreed to accept the result as binding. In the event of a “yes” vote, there will be negotiations between the UK and Scottish governments over the details for Scotland’s independence, with any actual move to independence probably taking place during 2016-19.

The potential problems that might face Scotland if it becomes independent have come into sharper focus.

First, the relative weakness of Scotland’s fiscal position is clearer. We judged back in March that the fiscal deficit of an independent Scotland (as a share of GDP) would be 2-3 percent of GDP above the UK average in coming years. This reflects Scotland’s relatively high level of public spending per head and the diminishing offset from oil and gas tax revenues, which are trending down amidst falling output and rising production costs. Data since then highlight this issue. Profits (ie revenues less operating costs and capital costs) from oil and gas production in Scotland (including a geographic split of oil and gas) have fallen from £14.0bn in 2011 to £7.2bn in 2013.



In turn, Scotland’s aggregate tax revenues (including a geographic share of oil and gas tax revenues) fell by 2.1% in 2013 after a 2.0% drop in 2012, with oil and gas tax revenues down 37% YoY in 2013 after a 24% drop in 2012. Scotland’s oil and gas tax revenues in 2013 totaled just £4.4bn (3.0% of Scotland’s nominal GDP), down from £9.2bn in 2011 and the lowest as a share of Scotland’s nominal GDP since 1999. Aggregate UK receipts of Petroleum Revenue Tax fell a further 42% YoY in January-July this year, although data for receipts of oil-related Corporation Tax (which recently have been larger than PRT) are not yet available.


Second, the referendum campaign has not dispelled uncertainties over Scotland’s possible currency policy. The SNP’s stated aim is to seek a formal currency union with the rest of the UK, while taking over a proportion of the UK national debt (either the population or GDP share, it would make little difference).


However, the Conservatives, Labour and Lib Dems have all ruled out a currency union. This point has been strengthened by the recent report from the UK Parliament’s Scottish Affairs Committee, which concluded that “a currency union between the continuing UK and a separate Scotland would not work well for either country. Scotland would be tied to an exchange rate which became less and less suitable for its economy, and heavily constrained in its economic policy. Without a banking and fiscal union, and the political union which is essential to sustain it, such a currency union would be unstable.”


The SNP does seem to have a Plan B, which is an informal policy of “sterlingisation” — whereby an independent Scotland would unilaterally adopt sterling as its currency without a formal currency union with the UK — while not accepting any obligation for Scotland’s share of the UK national debt. As SNP leader Alex Salmond recently argued: “There is literally nothing anyone can do to stop an independent Scotland using sterling, which is an internationally tradeable currency... Assets and liabilities go hand in hand, and no one would expect Scotland to pick up a share of the debt if we were being denied a share of the assets.”


However, sterlingisation would have considerable disadvantages for Scotland in our view, in that an independent Scotland would have no say in the monetary policy of the rest of the UK (rUK). In addition, while the BoE does regular sterling operations with a wide range of banks in respect of their UK business, Scotland’s banking system would have no guaranteed access to a lender of last resort facility or provider of emergency liquidity. The BoE’s adoption of a formal mission statement (“Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability”) makes it clear that the BoE’s responsibilities are limited to the economic and financial stability of the UK. The BoE is not responsible for the monetary and financial stability of any country (including an independent Scotland) that is pursuing a sterlingisation policy (although it might have to offset the effects on the rUK of any Scottish-related instability).


The experience of EMU crisis countries in recent years - until Draghi’s “whatever it takes” commitment made it clear that the ECB would seek to ensure financial stability in the periphery - highlights the possible dangers that could face an independent Scotland pursuing sterlingisation. Indeed, the Scottish government’s own Fiscal Commission has suggested that sterlingisation is unlikely to be a durable framework: “International evidence suggests that informal monetary unions tend to be adopted by transition economies or small territories with a special relationsip with a larger trading partner (e.g. between the UK and Jersey, Guernsey and the Isle of Man). Advanced economies of a significant scale tend not to operate in such a monetary framework. Though an option in the short-term, it is not likely to be a long-term solution.”4 The National Institute recently reached the same conclusion, arguing that sterlingisation probably would not be viable for long, especially given Scotland’s large banking sector5. In our view, it is astonishing that the Scottish government, in seeking independence, has reached this stage without a clear plan for an issue as basic as its currency and monetary policy setup.


Third, there continue to be uncertainties over the large Scottish banking system, with assets in excess of 1000% (one thousand per cent) of Scotland’s annual GDP and including large businesses in the rest of the UK. If these businesses remain Scottish-based, then the potential costs if the Scottish government has to provide a bail-out or deposit guarantee insurance could threaten Scotland’s fiscal position. However, as the National Institute warns, regulatory pressures might force these banks to re-domicile to the UK: “the Prudential Regulatory Authority is likely to require a systemically important bank carrying out its business in sterling to be based in the UK… The regulatory and commercial interests both suggest that at least the two government part-owned banks would redomicile into the rest of the UK.” Of course, if those banks were to relocate to the UK to gain a more secure fiscal backstop, Scotland’s economy and labour market would probably suffer.

Perhaps in light of these issues, the latest Scottish Social Attitudes survey shows that while a large majority of Scots still believe independence would lead to increased pride in their country, there are growing worries that independence would reduce Scotland’s voice in the world, harm the economy, increase income inequality, reduce the safety of bank deposits and harm peoples own financial position. The SSA survey suggests that the preferred option among Scottish voters is for increased devolution within the UK rather than independence outside the UK.

Opinion Polls Still Point to a “No” Vote

Although there is considerable variation among individual polls, we have not changed our base case scenario that a "yes" vote for Scottish independence remains a low probability, high risk event.

But What if... Some Possible Implications Of a “Yes” Vote

Nevertheless, even if a ”yes” vote looks unlikely at present, it is not impossible. In our view, a “yes” vote would have several key implications:

Bad for UK growth. Uncertainties over the economic prospects, policies and currency arrangements of an independent Scotland probably would hit growth in both Scotland and the rest of the UK (rUK), raising the incentive for firms to “wait and see” or to expand elsewhere. Exports to Scotland account for roughly 4% of GDP for the rUK and Scotland would immediately be the rUK’s second biggest trading partner, slightly behind the US and slightly above Germany. Moreover, many banks and businesses have sizeable cross-border exposures between Scotland and rUK, and some firms may seek to limit such exposure as a hedge against the possible breakup of sterlingisation (if that is the policy adopted).


Bad for mainstream UK political parties, good for the anti-EU vote. Once independence happens, Scottish MPs would no longer attend or vote at the Westminster parliament. This would disproportionately hurt both Labour and the Lib Dems: Scotland accounts for 9% of seats at the Westminster parliament (59 out of 650 seats in 2010), but accounts for 16% of Labour seats, and 19% of Lib Dem seats. Conversely, only one out of the 306 Conservative MPs elected in 2010 is from a Scottish seat. However, although the maths of a postindependence Parliament would favour the Conservatives, we believe a “yes” vote would also badly hurt the personal position of PM Cameron, by making him the PM “who lost the UK”. The key winner in UK political terms would probably be UKIP: this reflects the damage to the three main Westminster parties, the evidence that voters are prepared to reject the establishment and vote for radical change, and also the extent to which the themes in the Scottish referendum debate — a choice between membership of a larger bloc or independence — are likely to have echoes in any future EU referendum. A secondary winner might be London Mayor Boris Johnson, who seems to be positioning himself as the radical outsider as candidate to succeed Cameron as Conservative party leader.


Uncertainties are likely to drag on for a while. The Scottish government has said that in the event of a “yes” vote, it would aim to complete negotiations quickly and for Scotland to become independent in March 201611, ahead of the Scottish parliament elections scheduled for May 2016. In practice, the process might well take longer, especially given the interruption of the UK general election in May 2015 and possibility that the election might change the UK government. Indeed, given that Labour has now moved slightly ahead of the SNP in voting intentions for the Scottish parliament in recent YouGov polls, one can imagine scenarios under which negotiations on Scottish independence have to be completed after May 2016 under a Labour-led Scottish government (which opposed independence), a Labour-led rUK government and with a Johnson-led Conservative party in opposition that is moving towards advocating EU exit.


BoE on the alert: BoE Governor Carney noted in his Inflation Report press conference that the BoE would be ready to act if Scotland-related uncertainties escalate: “we also have responsibilities, as you know, for financial stability in the United Kingdom and we will continue to discharge those responsibilities until they change... Uncertainty about the currency arrangements could raise financial stability issues. We will, as you would expect us to have contingency plans for various possibilities”.

*  *  *

With a “no” vote, the UK would still face rising political uncertainties. The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

More broadly, "Referendum Risk" is one of the more powerful manifestations of what we have termed Vox Populi risk, the Crimea being a particularly powerful, if extreme, example. In particular, what happens in Scotland will be particularly closely watched in Spain, which is facing a referendum on Catalan independence. Latent independence movements elsewhere, such as Belgium, could also be influenced by the outcome in Scotland. We regard the revival of local/national concerns, from Scotland to Spain and beyond, as part of continuing anti-establishment sentiment and a backlash against globalisation. And the UK experience (with growing support for UKIP alongside faster economic growth) raises the issue that economic recovery alone may not be enough to reverse the rise in anti-elite, anti-establishment sentiment.

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Da Yooper's picture

If they vote yes


just think of all the US financial aid it would qualify for


that alone should give Scotland's bankers a never ending hard on


Kirk2NCC1701's picture

Let's hear it for Freeeee-Duuumb!


Deathrips's picture

It'll be a sheep fucking good time!!!




ZerOhead's picture

< Yes

< No   (But if you throw in some good-looking sheep it's a done deal)

“Should Scotland be an independent country with free haggis and whiskey for all?"

knukles's picture

The Scots invented scotch, haggis and television.
What could be better than that?

Jstanley011's picture

And scotch tape, don't forget the scotch tape. And bagpipes, don't forget the uh... nevermind...

SWRichmond's picture

A vote for moving to a smaller political subdivision is NOT a vote for freedom, but it is a move in the right direction.

jarana's picture

Good one.

But one should walk on eggshells here.

Nationalism is a double-edged sword. It's good if, as you say, takes people to a less powerful government, or releases people from tyranny. But nationalism is prone to end in colectivism, specially when some "racial", "historical" or stuff like that are in play, deviating the focus from the individual (the only "social" fact that realy exists).

I was born in the Basque Country. Nationalism and independentism against Spain is strong there, and not all that glitters is gold in "heroic" nationalisms against "the invader". At the same time, decentraliced economies and societies with "overlaped" and plural identities are better places for freedom in my view.

Anyway, the way you refer to it, "a smaller political subdivision", makes me believe that none of the considerations above apply to you. So just digressing...

espirit's picture

Profits are dropping below output, which in the past has run parallel.

Methinks someones' skimming...

Jack Sheet's picture

The gay Scotsman, walking through the jungle, was hoping for a monsoon.

Abitdodgie's picture

I went to Edinburgh University back in the early 90s and spent most of my time at Grayfriers Bobby , they know how to drink , unlike England the pubs stay open to 2 am , so did not see many morning classes but had great fun.

disabledvet's picture

Finally! Mel Gibson can be seen in public in more than just Thailand!

Pinto Currency's picture



Wait until Scotland starts trading oil for gold.

Major ISIS problems coming to Edinburgh.

Theosebes Goodfellow's picture

Stop it, Pinto. Stop the politically correct hidden terms. It's called a "Muslim Problem". And on this side of the pond, we can still, (at least for now), say it. Edinburg has a Muslim problem. So does Londonstan, Parisstan, Brusselsstan, Berlinstan and Copenhagenstan, (not to mention Malmo, Vienna and most of Italy).

Islam is facism. It's the cult of booty. It's about who is the strongest man and how long can he hold power. Everything else is permissible, from murder, to rape, looting, extortion and deceit. Because that is exactly what the "Prophet" did, and he is still today the epitome of how Muslim men should behave, (at least according to the Qur'an and the ahaditha(s).

Your daddy, or your granddaddy or even his daddy fought facism. Theirs was cloaked in national socialism. Now it's our turn and ours wears the cloak of situational theology. Just as your forefathers wanted no part of their fight, (but did it anyway because it had to be done), the time is coming when all of us will have to step up. The sooner we wrap our brains around that reality the sooner we can end it, because if we don't stop it, we will have to either surrender, convert or die. Those are the only choices we will have.

Just remember this: Good Muslims=kills infidels; Bad Muslims=have infidel friends. And yes, that's in the Qur'an too.

Qur'an (5:51) - "O you who believe! do not take the Jews and the Christians for friends; they are friends of each other; and whoever amongst you takes them for a friend, then surely he is one of them; surely Allah does not guide the unjust people."

Qur'an (5:80) - "You will see many of them befriending those who disbelieve; certainly evil is that which their souls have sent before for them, that Allah became displeased with them and in chastisement shall they abide."  Those Muslims who befriend unbelievers will abide in hell.

Qur'an (3:28) - "Let not the believers Take for friends or helpers Unbelievers rather than believers: if any do that, in nothing will there be help from Allah: except by way of precaution, that ye may Guard yourselves from them..."  This last part means that the Muslim is allowed to feign friendship if it is of benefit.  Renowned scholar Ibn Kathir states that "believers are allowed to show friendship outwardly, but never inwardly."


Pinto Currency's picture



Radicalized muslims like ISIS only seem to get US / NATO funding & training when they are at or near oil producing countries.



Notsobadwlad's picture

Have you ever met or talked with a Muslim? Just curious. As mentioned in another thread, I have some progressive friends who are deathly afraid and prejudiced against what they call "radical muslims" and yet they have never known a muslim, much less a radical one.

If there are radical muslims, then I suspect that they have the same sociopathic disease that affects the US government and technocrats worldwide. Does that make them sane or insane?

Theosebes Goodfellow's picture

The term "radical Muslim" is a misnomer. Nidal Malik Hasan, former US Army medical doctor and psychiatrist, was not considered a "radical Muslim" right up to the day he murdered 13 of his fellow servemen. And that's the rub. Islam allows something called Taqiyya. It's basically a Mulligan to lie to non-Muslims. There are no non-radical Muslims. There are just Muslims who have not "radicalized", as it were. Members of the cult of Mohammad, however benign in appearance, worship at the altar of the concept that murder, rape, extortion, theft and brutality are acceptable means to either force others to believe, deprive them of half of their possessions or, if all else fails, kill them. I know that implying that the "US government and technocrats worldwide" do the same comes off glib, but I don't see either engaging in what ISIS is doing or what Islam teaches. Well, not at least not yet. That said, it's still very early in the game.

Dewey Cheatum Howe's picture

Yes remember they are human beings not animals. These problems ultimately root from within humans and as such people are the root problem and the solution. The ideology, religion is just a way that problem manifests itself as. Remember these things are human created ideas and such.

strangewalk's picture

I knew a couple of Pakistani guys in Hong Kong who hated Americans, Christians and Jews...they tolerated me but told me to be careful--lots of Muslims in Hong Kong. Then, a Muslim clerk at a 7-11 store told me there should be an overthrow of the US government for allowing people to buy beer and wine, he was serious. Another Muslim guy with his own little store said that if a Jew came in he would kill him. Some friends of mine talked about having lunch at the Holiday Inn in the request of other patrons the waiters had to put room dividers all around their table so the Muslims wouldn't become despoiled. 

ZerOhead's picture

"Islam is facism. It's the cult of booty. It's about who is the strongest man and how long can he hold power. Everything else is permissible, from murder, to rape, looting, extortion and deceit."

It is also the default operating system the entire planet has been operating on for pretty much the past several thousand years...

Theosebes Goodfellow's picture

Nonsense. You confuse facism with capitalism. Islam has turned facism into a religion. It prohibits discussion and dissent. Capitalism is an all-volunteer endeavor. Nobody holds a gun to your head and forces you to do business, (except the US government lately).

strangewalk's picture

Are you kidding? How about all those pagan worshippers in Latin America who were saved by the Church?

zerozulu's picture

There might also be written some where that people who deal in FIAT can never be your friend.

QQQBall's picture

Speaking of situation theology, I like the Cult of Booty part

Lord Wakefield's picture

An eye opening book on the use of Pedoephilia amd sexual explotation by IslamoFacists in UK society. Pretty much applies to most European cities.

adeptish's picture

Whiskey is Irish.

Whisky is Scottish.

css1971's picture

You ... realise that you are talking about an accident of spelling. The word is the same, means the same and comes from the same origin.

Scots and Irish whiskies are made in almost exactly the same way.

August's picture

And let's not even talk about wódka.

Democratic koolaid's picture

Scotland makes $4 billion annualy from whisky alone...

The modern world was created by the Scottish and it now needs Scotlands to be free to save it.


kchrisc's picture

Just another nation for the Rothschild banksters to milk and kill.

An American, not US subject.

DetectiveStern's picture

Rather live in an Idenpendent Scotland than a United Kingdom...


...An Englishman.

kchrisc's picture

Guillotine the Rothschild central banksters and you won't have to move.

Ditto the American people.

An American, not US subject.


"Guillotine the Fed!"

Lord Wakefield's picture

It won't be an independent Scotland. An "Independence" with-in the EU will mean a steady erosion of power from Edinburgh to Brussels over the next generation. While at the same time using the GBP be a lackey to BOE and under the Euro to the ECB. Alex Samond is a opportunist shister who relies on romantic nationalism to fulfil his own egotistical need for power. 

Coletrane's picture

freedom and independence neccessitate responsibility and hard work.

 few people in today's world are courageous enough to make the leap.

Notsobadwlad's picture

I disagree. Many people are.

knukles's picture

Oh yeah?  Well my many is bigger than your many.
Nah na na na nah na

Notsobadwlad's picture

Yes, I have a small many ... but it make up for it by not lasting very long.

rbg81's picture

Actually, I'm kind of envious.  Wish that California would secede from the Union.  Even better, I wish we could vote to expel her.  Let the Libs get their death-wish when Mexico takes it over.

Kirk2NCC1701's picture

Och aye, but will HRH, QE II finally have to pay fucking taxes for her monstrous estate (Balmoral) in Scotland?

In Scots Pounds or in Gold?  Or will Scotland get another Tour from "Ben Doon and Phil McCracken"?


FieldingMellish's picture

Not likely because while they may become an independent country they will remain a monarchy with the Queen as their head of state. This is the same situation as they had before their union with England in 1707 as the crowns were united 100 years earlier under James the I (VI) in 1603.

Bankruptcy forced them into union the first time and will likely again after a few decades of "independence".

wintermute's picture

Scotland will never be independent until it becomes a republic.

disabledvet's picture

What's wrong with Queen?

Hell of a lot cheaper to hand out titles than to bail out Goldman Sachs that's fer sure.

Notsobadwlad's picture

A. Scotland goes independent.
B. Scotland does an Iceland
C. Scotland immendiately becomes a target for ISIS

It would certainly expose ISIS for the false flag it is... and who is pulling its strings.

Go Scotland!!

(The problem is that it no longer matters how people vote, or who counts the vote, only who announces the vote ... and the captive MSM will be instructed to not allow a decision for independence to be announced.)

Democratic koolaid's picture

The sterlng was Scotlands first.  The bank of England was founded by a Scotsman.


Most importantly do you all realy think the British Empire would have become "the empire the sun never set apon" without Scotlands participation? England should f-off and let Scotland be free from their decretum and destructive policys.   

Let Scotia brew their own Koolaid.

Creepy A. Cracker's picture

Golf courses and a lot of sheep.  A super-power in the making.

Notsobadwlad's picture

And oil. It could however signal a return to Silicon Glen with the right tax incentives... not having to carry the weight of parasitic banks and UK government.

Coke and Hookers's picture

I will gladly accept Scottish Kronur for my services.

Winston Churchill's picture

With a climate only slightly better than Icelands.

If you thought English weather sucks, try Scotland for a reference yardstick.

What going to happen to the RN SLBM base at Garelockhead, and the USN one at Holy loch ?

But I fondly remember getting my car head butted by a drunken Glaswegian falling out

of a pub.