Why Scotland Has All The Leverage, In One Chart

Tyler Durden's picture

As Scotland prepares to vote for or against Independence from the Union on Thursday, it appears everyone has an opinion on what may, what should and what will happen. At the basis of every such opinion is some basis in fact, misguided as it may be in most cases, about who has all the leverage, with the dominant one being that Scotland would make a horrendous mistake if it says goodbye to the UK and puts a border around what is currently a third of UK's landmass.

Some, such as Deutsche Bank, the bank that has the single greatest derivative exposure in the world and is therefore most leveraged to maintaining the status quo, saw its "Chief Economist & Member, Group Executive Committee, Deutsche Bank AG" David Folkerts-Landau personally put pen to paper on Friday and in rambling, demagogic terms, explain why it would be a "Wrong Turn" for Scotland to seek self-determination.

He says that, "A "Yes" vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill's decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US. These decisions – well-intentioned as they were – contributed to years of depression and suffering and could have been avoided had alternative decisions been taken." Sure, there could have been no gold standard and the Fed could have gone full-Bernanke, and it would only have kicked the can a few years leading to an even greater depression, as the recent paradigm of "bubble to bubble" transitions, described by none other than Deutsche Bank, is where the world finds itself. In fact, it is DB that admitted last week that without a bubble, the western financial way of life is finished.

DB's Landau concludes with the following outright propaganda:

Most importantly, the world as it is evolving in the 21st century is a highly uncertain place with unstable geopolitics and a stressed economic and financial outlook. Why anyone would want to exit a successful economic and political union with a G-5 country – a union which another part of Europe so desperately seeks to emulate – to go it alone for the benefit of... what exactly, is incomprehensible to this author.

Well, maybe let's ask what is increasingly a majority of Europeans across the ill-fated and artificial Eurozone, whose fixed currency means the only devaluation possible is internal, read crashing wages. But of course, the head of something or another at Deutsche Bank has nothing to worry about in this regard.

And yet, as always, the bottom line is about leverage and bargaining power. It is here that, miraculously, things once again devolve back to, drumroll, oil, and the fact that an independent Scotland would keep 90% of the oil revenues! As we showed several days ago, Scotland's oil may be the single biggest wildcard in the entire Independence movement.

It is this oil, and its interconnectedness within the UK economy, that as SocGen's Albert Edwards shows earlier this morning, is what gives Scotland all the leverage.

From Edwards:

it is increasingly likely that it too it will be joining Scotland in permanently exiting the EU club. First of all, consider the vulnerability of sterling after a Yes vote for Scottish independence. Even without North Sea oil revenues, the UK current account situation is a mess. The left-hand chart below is one I put up at the end of our flagship conference in January this year. The point I made was it is absolutely extraordinary for the UK to be beginning an economic cycle with a current account deficit of around 5-6% of GDP. Normally this is a level the UK or any other developed countries get to at a height of a boom after years of overspending on consumer imports. I think I described the UK position as an economic abomination of the highest order and that this economic cycle was likely to end some years from now in a calamitous sterling crisis - just like we used to have in the past.



Our specialist macro salesperson, Richard Walker, thinks that it is in the rUK's economic interest to retain some sort of currency union with Scotland after independence as he points out Ireland did after its own independence in 1922 until 1979. He believes the maths for the rUK just don't add up - on the basis of an independent Scotland keeping 90% of the oil revenues the rUK current account deficit for the full year would have been around 7% of GDP instead of 4½% (also see right-hand chart above).

There's that pesky "mathematics" again. Here is what the math reveals:

Personally I don't believe that the rUK will conceive it possible that any continued currency union is feasible after independence having observed the eurozone mess. That means the yawning fault line in the UK's economic situation will be revealed for all to see. Indeed since we used that chart of the UK's current account mess in January this year, the deficit in Q3 last year was revised from 5% to 6% of GDP! That horrendous deficit persisted in Q4 at just under 6% of GDP but improved somewhat in Q1 of this year to 4.4% of GDP. That improvement though to me looks erratic and liable to reverse, most especially as the trade deficit through July continued to deteriorate. So, if rather than the 2013 full-year UK current account  deficit of 4½% of GDP; the underlying situation is more reflective of the almost 6% deficit seen in H2, then the rUK current deficit will be nearer to 8 1/2% of GDP! The UK is due to release its 2014 Q2 Current Account data on 30 Sept.


For the UK as a whole the current account deficit is awful. For the rUK it is simply untenable. If investors are selling sterling in anticipation of a Yes vote, the economic reality of a rump rUK will see sterling quite rightly plunge into the abyss way before the end of the economic cycle (where we previously expected the turmoil would come).

Which also means that contrary to the UK's fire and brimstone, it is the UK that has much more to lose in a world in which Scottish oil output is suddenly unavailable to plug current account deficit gaps, something the US has been able to do in the past 5 years courtesy of the transitory shale boom.

The vulnerability of sterling in a rUk world is made much worse as investors come to grips with the increasing prospect that the rUK will be leaving the EU. Capital will not be moving from north of the Scottish border to the south. It will be moving out of the UK altogether. And, with the rUK needing to attract capital at an unprecedented avaricious rate for this point in the cycle, this ain't going to be pretty. Interest rates, which are probably set to rise next year anyway, may be set to rise a whole lot faster than anticipated if we get a good old-fashioned sterling crisis, with the good old-fashioned inevitable recessionary consequences thrown in.

The bottom line, at least to Edwards, is that Thursday's vote will set in motion the independence not only for Scotland, but for the UK from the EU club:

So in the event of a Yes vote in the imminent Scottish referendum I would expect both Scotland (involuntarily) and the rUK (voluntarily) to find themselves outside of the EU club.

And should that happen, all bets are off for the continued existence of the greatest "unionization" experiment in modern history: Europe itself.

We saw similar trends towards political extremes to a greater or lesser extent in the beleaguered GIIPS (Greece, Italy, Ireland, Portugal and Spain) during the crisis. As Dylan has previously explained, political extremism becomes a very attractive proposition when a country comes under stress. Europe has a long history of such tendencies. Separatist and nationalist movements throughout Europe are gaining a stronger foothold with nationalist fault lines previously thought dormant awakening in unison right across Europe - see for example this interesting article from Ambrose Evans-Pritchard - link. The outcome of a Yes vote in Scotland may have as unpredictable consequences as did events in Eastern Europe in the late 1980s. A yes vote will send the EU bicycle (or if you prefer, shark) into reverse for the first time since the 1957 Treaty of Rome, with wholly unpredictable consequences.

Good luck, Scotland. The fate of a century of globalization and wealth-transfer efforts suddenly lies on your shoulders.

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GetZeeGold's picture




Pull the damn trigger!


There's a 90 day return policy.....what the hell?

post turtle saver's picture

whoever ends up with Scotland will own the keys to manipulating BFOE... if you thought LIBOR manipulation was bad, you ain't seen nothin' yet...

SilverIsKing's picture

I've been suspicious of those Scots hiding WMDs in churches, schools, and hospitals.

Am I ahead of the curve on this?

Cue war drums...

Arius's picture

Scotland is key ... UK will not be able to survive intact and it will effect geopolitics worldwide.


Funny how things change with just a referendum ... people around the world should learn from this example and do the same ...


just divorce, dont have to kill each other!

SoberOne's picture

Im going long blue face paint and broad swords.

SafelyGraze's picture

+100 silverisking

"an independent Scotland would keep 90% of the oil revenues" which is why we must boots-on-the-ground them

nope-1004's picture

This banker pimp piece is pure garbage.  He puts words in the mouth of citizens and makes some pretty insane assumptions.

Typical idiot financial dude.  Too stupid and incompetent to provide any real value to the economy, other than writing his fictional opinions (like anyone cares), insider trading, and manipulating PM's and Forex. 

These bankers are total sleaze balls.


BobPaulson's picture

What is funny is how he argues Scottish independence is stupid like having a gold stanard or NOT printing money. Case closed. Thank you Douche Bank for summing up the pro independence argument so succinctly!

SAT 800's picture

It's important; and when it's important, you lie; remember ? The propaganda machine is screaming in high gear.

disabledvet's picture

Bavarian making noise. The Prussians want Austria's Silesia back.


kaiserhoff's picture

But it's been a thousand years of friendship and cooperation...

Hmmm.  Where have I heard that before?

PT's picture

SilverIsKing:  You stole my thunder.  (Actually, you didn't steal it.  You won it fair and square.)

Maybe that is why so many towels have been allowed into the country over the years.  Gotta plan ahead for these contingencies!

Get ready for some bizarre propaganda about what Scotsmen really wear under their kilts.

PT's picture

I hear ISIS have already hijacked a boat and are on their way.

They're going to open a new franchise and call it the Scottish ISIL.

Dr Strangemember's picture

many have suggested my sword is broad.  

philipat's picture

Oil revenues are now insinificant to England (About GBP 7 Billion PA and falling), which, unlike Norway (Which sensibly invested its revenues from North sea oil and gas in a Sovereign Wealth Fund), has pissed away the vast majority of the income. That allowed Thatcher to work her "Miracles" by pouring all the oil money into wasteful BS.

If the Scots want independence it is their choice but IMHO the consequences will be dire. The Devil is in the detail and none of the detail has been worked out yet.

Incidentally, if the Scots have the right to "Self-determination", without the other half of the divorce having any say, why should it be any different in The Crimea and Eastern Ukraine? Double standards again??

NidStyles's picture

Wait, so because England failed to develop it's future Scotland is automatically cursed to repeat the situation? 


What a lousy argument.

philipat's picture

Not my arguement at all. Please refer to the title of the Article which is "Why Scotland has all the leverage", implying oil revenues are the key. That is what I dispute. And I do accept Scotland's right of self-determination (See above).

The fact is, and you can blame who you will, most of the North Sea revenues have already gone. Had The UK invested the revenues wisely, like Norway, Scotland could now be claiming a share of a very large Soveriegn wealth fund as part of the terms for separation. Blame Thatcher for that, not the Scots. But it is all "Water under the bridge". Which was my initial point.

Net Net, England subsidises Scotland to the tune of about GBP 30 Billion PA. That doesn't include indirect subsidies from businesses which would re-locate to England after a Scotland separation.

I have no problem with it being the choice of Scots themselves. Equally, I have no problem with it being the choice of Crimeans and East Ukranians themselves.

disabledvet's picture

Sweden just a big election where the two party system over there got taken to the woodshed too. "Hurry up! Label everyone but you a Nazi!"

The sooner the Nuremberg Trials of the current order gets underway the better. The USA might even get the moral authority it squandered in 1989 back. What a Nation of Losers the USA has become. Even the propaganda isn't even trying to make sense anymore. "Go phuck yourself" seems to be the bi-partisan platform now.

imaginalis's picture

There have been massive finds in recent years but hushed for reasons quite obvious. After a no vote, look for them to be announced. Until then have a wee peak at this, this, this and this.

sandhillexit's picture

Scotland will have a claim on the Arctic.  It will be interesting to see if Scots quietly demand to take over those ships in the harbor on Friday morning.  When the divvying up of Arctic claims starts in earnest (because of course there is no global warming/sarc), number of ships is going to matter.  Denmark has all of Greenland but they will have a tough time makiing their claim stick. Same with the Norwegians. Same for the Canucks. Scots pols also know that after GBrowne there won't be another Scots PM in the UK for a long, long time.  

SAT 800's picture

Whether or not a given revenue stream is in-significant or not; depends on whether or not you're 'canny"; eh? A small revenue stream is better than a negative balance of payments. The Scots are verrry canny, Laddie; they can make do.

JRobby's picture

This is the first real moment that has been presented to slap the NWO in the face.


sandman.s's picture

I don't believe that they will succeed though.  There is too much riding on this for the higher ups and they will never let it happen.  How do you beat the guy that counts the votes? 

chubbyjjfong's picture

Unless they want it to happen and need something to conveniently blame.

Payne's picture

They will always have next year, another election

JRobby's picture

NOW is the time!

Do not allow an additional year of scaremonger tactics.

JRobby's picture

No progress is possible without positive thought.

For our children and grandchildren, the cartels must be smashed.


venturen's picture

UK is fine....they have a printer!

SAT 800's picture

I have a direct family ancestor who wore a sling on his right arm around the town, one fine day, and when people asked him how his arm was; he replied, ":it be fair sore from the killing of Englishmen all morning"; which was literally true on that day. Forget, my ass; REMEMBER.

HardAssets's picture

I've been to Scotland, but am definitely no expert. But, I hope the Scots throw off the yoke. It would also be a crack in the new world order plan that could energize the world. For that reason TPTB will pull out all the stops, you can expect vote tampering.


More than a 100,000 Scots 16 and 17 years of age are registering to vote. Who knows, perhaps these young people and the spirit of William Wallace will see Scotland through to freedom.



Stoploss's picture

"you can expect vote tampering."

It's the only way they can win, been going on for years and years.

They are going to have to have all the police and national guard at all US voting stations.

The fireworks haven't even started yet.

SAT 800's picture

It won't be necessary to weaponize the fight to maintain Scotland as an economic colony of the Damned filthy English, (yes, I am a Scot). As you may have noticed, all the propaganda stops have been pulled out to "11"; and the spin machine is whirling frantically. Nowadays, the public opinion managers can get you to vote for a Kenyan; as un-likely as that may seem; or to continue your economic slavery.

Againstthelie's picture

Scotland, grab the oil and say "f.ck you" to the parasitic City of London ruling you for centuries!

PT's picture

I can just imagine the City of London redrawing its borders to define itself as a part of Scotland ...



Yes, I truly am that ignorant in such matters, but since when has the world made sense anyway?

Koolkoala's picture

Things might be changing in Great Britain, but it not-so-great Italy, things stay the same, 

an example ?


Meanwhile in Italy...


Retelit is quoted on milan stock exchange: No CEO, No CFO, No brains and equity value destruction that continues to go ahead unnoticed

check it out, it's quite shocking:



JRobby's picture

This article is not about Italy.

SAT 800's picture

You're damned right, William. And they can stuff their opinion on the Scots in their Asses.

rubiconsolutions's picture

It's interesting how when large groups of people withdraw their consent by way of voting that is construed as a legitimate mechanism. However, if an individual decides to withdraw their consent they are a terrorist or a nut job. It just goes to show you that the individual means absolutely nothing to society other than being a cash cow for the collective. #socialcontractconjob

SAT 800's picture

Anything that sends the EU bicycle into reverse is greatly to be desired; as the longer the farce continues, the more dire the consequence for the long suffering populace.

Dr Strangemember's picture

Texas, Alaska, Southern Leauge, Hawaii, NE and the Canadian Maritimes (And whoever wants California???) are you listening????

KnuckleDragger-X's picture

If the vote goes yes I expect the eventual splatter pattern to be of Jackson Pollard quality and the flying crap will go everywhere......

Atomizer's picture

Vote Yes and be done with it. 

Freddie's picture

Vote Yes but do not join the EU or become part of the Euro.  If you do you will get screwed over like Ireland. 

GetZeeGold's picture



Walk like an Icelander.......show the way to true freedom.


William Wallace.

Stone of Scone.

Tap, tap.....is this thing on?

Bangin7GramRocks's picture

Goldman is rounding up all the Scots on the payroll. They will be inserted into the new leadership if there is a Yes vote. These fucking snakes will steer the independent Scotland towards the bankers wishes. Make bet on that missy!

JRobby's picture

Good point. Scotland should, as a first order of business if it does become independent, expel all current and former Goldman employees and anyone appearing to have Goldman influence.

From a national security standpoint, if they treat Goldman like a parasitic terror group as a matter of policy, things should go well for the new Scotland.