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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TheReplacement's picture

Yup, until we bomb their terrorist asses.

Ghordius's picture

Freddie, I remember the tapes where the Anglo-Irish Bank executives were bragging how they would screw all europeans, including Germans and Irish
But don't let facts disturb your Myth of Ireland being screwed by the EUR

free_lunch's picture

Every European citizen is being screwed by the EURO that is created as debt owed to a privatly owned and controlled central bank instead of using their national debtfree currency created by their own national central bank.


Edward bernays is no stranger to you..

Ghordius's picture

free_lunch, your argument is wrong, when it comes to the ECB. because it's owned and controlled by national banks, not a private cartel of NY Wall Street banks like the FED, as I was explaining in greater detail further down in the same article. the EUR, for all it's faults, is a very public fiat currency

hell, even the British Pound is a public fiat currency, then the Bank of England was nationalized right after the Second World War

JRobby's picture

Gordy, please check the auto loan subprime bubble piece here today, ie the post about auto dealers in wheelchairs

free_lunch's picture

Goldman Sachs takes over America and now Europe


The European Scam Mechanism(ESM)

The Maastricht Treaty and the Statute of the ESCB of the primary objective of price stability, the pursuit of which is delegated to an independent central bank system 

The Treaty (in Article 107) and the Statute of the ESCB (in Article 7) both contain very clear provisions regarding the relationship with third parties, which leave no room whatsoever for misinterpretation. To quote a key sentence: "neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body". Moreover, the aforementioned authorities shall also - and I quote again - "undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks".


So taking no instructions from 'the people', but seeking instructions at regulary BIS meetings with international bankers?

Conspiracy fact: Top central bankers meet secretly every six weeks at BIS

"especially now that the world's central bankers, five years after the Lehman crash, are more powerful than ever. They set interest rates and control the money supply, oversee governments and banks and, like Bank of England Governor Mark Carney, are treated a bit like movie stars by the public.

To an extent unprecedented in postwar history, monetary watchdogs -- who are not elected and are usually independent of their countries' governments -- determine what happens in politics and on the markets. They are the new "masters of the universe." Yet their internal discussions on the effects of their power do not give the impression of resounding success. Growth is limping along in the world's major economies; banks, households and governments are deeply in debt; and the bankers' so-called unconventional monetary policy is running up against its limits everywhere.


overmedicatedundersexed's picture

Ghordius must be forgiven, with all that history in (his / her) head..ghordius cannot remember that the FED supported banks such as Dexia in 08 and 09..per ghordius calling the Fed a cartel of NY wall street banks.

Ghordius what other EU banks got bailed out, it will come back to you..the euro was never enough to keep the EU banks afloat.

Ghordius's picture

+1 for the detail, yet my argument is about control of central banking by megabanks. perhaps I have to write a longer commentary on it, one of those days

have a look at your argument: megabanks cried for help, and who came to the rescue with the biggest guns?

Rakshas's picture

....... Anglo-Irish Banksters??  do bankers associate themselves to particular nations?? I was under the impression they believe themselves omnipotently  etherial......  like to test that theory one day ....

Ghordius's picture

the executives of the bank called Anglo Irish Bank (http://en.wikipedia.org/wiki/Anglo_Irish_Bank / www.angloirishbank.ie), which nearly bankrupted Ireland, and is now called Irish Bank Resolution Corporation

read the legendary ZH article where they picked the sum of what they wanted for their bailout out of their arse:


FeralSerf's picture

It's puzzling that you keep suggesting these criminals somehow represent the average Irishman who did not condone or even know about their theft. They used their (bought with stolen money) political influence to avoid the criminal prosecution that they deserved. They stole from Ireland, just as they stole from everyone else that they could steal from. They also stole from Ireland's unborn as well, who could not have been a party to their theft.

It should be noted that "Anglo" comes before "Irish" in the bank's name.

The London banks and the ECB had a legal and moral responsibility to ensure that thefts such as these did not happen. They failed miserably in their responsibility.

Ghordius's picture

to me it's puzzling that you keep misreading what I'm writing. where did I "suggest these criminals somehow represent the average Irishman"?

FeralSerf, who was the regulator in charge of the Irish bank called "Anglo-Irish"? Not London banks and for sure not the ECB, at those times

people keep bringing the Myth of Ireland Being Screwed by Outside Forces

I keep bringing the FACT that Irish Criminals Did It. You keep distorting my point by construing an Attack On The Average Innocent Irishman

is it just impossible for you to contemplate that Ireland Got Screwed By Irish Criminals While The Irish Regulator Slept And The Irish Government Looked Away From A Giant Real Estate Bubble?

FeralSerf's picture

It's pretty difficult to believe that all those expert bankers with all of their big expensive staffs and information systems in London and Frankfurt had no idea what was going on in the Irish banks. Are you suggesting they all were playing kangaroo with their heads in the sand?

It was no secret that there was something wrong with Irish property market.

Is it just impossible for you to contemplate that Ireland Got Screwed By international banking Criminals While The Irish Regulator Slept And The Irish Government Looked Away From A Giant Real Estate Bubble?

From the evidence, one can reasonably suspect that the so-called Irish "Regulator" and many in the Irish Government were sleeping with the enemies of the Irish people. Bribery is an international crime.

Ghordius's picture

if you put it this way, then no, I even think you have a solid theory with vast amounts of evidence

the problem is that every possible bubble has those ingredients, strike the  international criminal intent. When it bursts, you find some bankers were careless, others outright criminal, sometimes putting the bill on the taxpayer, and others - sometimes hedgies, sometimes investment funds profiting from the mess

from a national point of view, someone has to open the gates for the enemy. is bribery strictly necessary? imho, no. profit makes some blind enough

free_lunch's picture

Ghordius is just a eloquent mercenary for the international banksters and their EU, he tries to use deception and distraction to confuse average Joe, while promoting global debt enslavement and the sovjet like EUSSR dictatorship.

He tries to present himself as one of us using the Irish bankers phone calls, and tries to separate this from the central banking scammers..

FeralSerf's picture

In any big crime, it's important to have one's patsies lined up so the real criminals can get away unscathed with the loot.

It was like taking candy from a baby.

Ghordius's picture

me promoting debt enslavement? dear free_lunch, I don't think so. I regard the modern debt peddling akin to drug pushing. I, for example, am all for state intervention in limiting personal debt levels. I find the Swiss and their recent political moves in this direction - together with the previous restrictions they already have, as very interesting

the way a banking system has to work is imho something different from how a monetary system should work

spanish inquisition's picture

Escaping one slave master to run into the arms of another.

It will be amazing how fast terrorists groups target Scotland because they voted to be free. Cameron is thinking, let's, I mean if ISIS bombs Scotland, we can use that to get the UK behind another war. Two birds with one stone!

JRobby's picture

A real consideration since the NWO sponsors terror groups.

SAT 800's picture

LOL. Not to worry; no Scot is going to vote to join the bloody crazy EU.

recidivist's picture

Groundskeeper Willie sums it up well.  But with petrodollars on the line, some voting irregularites may be observed.

SoilMyselfRotten's picture

Don't worry Diebold will take care of that

GetZeeGold's picture



Zero yes votes....it was a miracle.

Government needs you to pay taxes's picture

How strong is the UK's free shit army?  Will the mighty legion vast show up at the polls?

Government needs you to pay taxes's picture

Mi5 and Mi6 will be carefully supervising the vote-count. This should be quite comforting to the Scots.

Rakshas's picture

I would love to see Scotia advertise extremely favorable tax and banking regulations, an iron clad offshore banking mecca if you will and tell the US/UK/EU to ram it when they come a knocking....... you know a good old fashion cunt punt.....

Atomizer's picture

Cunt punt, I love that phrase...

AdvancingTime's picture

Several complex issues surround the idea of Scotland going off on its own. If Scotland wants independence then so be it, but sorting out the political and economic ties with the rest of the UK, may be difficult. Scotland has to be allowed to stand on its own two feet without the rest of the UK financially and economically supporting it. The Euro proves that more than one sovereign country cannot easily use the same currency. Portugal, Ireland, Greece, Italy and Spain have discovered that you cannot have full independence and share a currency. Another issue is how much of the debt the UK owes will be transferred to the new nation. More on the issues surrounding the pound and an independent Scotland in the article below.


Ghordius's picture

"The Euro proves that more than one sovereign country cannot easily use the same currency"

so full sovereignty/independence is all about the power of devalue (which is a "soft" form of default) (on) your promises/debt/currency?

If so, it follows that a sovereign using gold... would be less sovereign & independent then one using fiat, eh?

free_lunch's picture

That's a funny statement.

An honest person can never win from a gifted cheater. 

The most deceptive and evil one will always win, because a moral man's actions are limited by his moral standard, a psychopath has no limits and will eat babies alive if this gets him 1 inch closer to victory.

This means that the nature of things makes it highly likely that key positions will be won by the most evil men.  Cheered by other evil men who bond to gain advantage.. You see them on ZH as well, don't look to far..

Gold would be preferred, but it can only work if fiat is valued for what it is: worthless paper and thus refused by every nation.

It is like doping in sports, as long as some are using it, it is unfair competition that is bad news for everybody, even the winner/cheater because he is destroying his health.


conscious being's picture

Relax. We're about to roar past peak-cheating and Babylon will all crumble down.

Ghordius's picture

"An honest person can never win from a gifted cheater" Strange, I thought the saying went like: "You can't cheat a honest person"

Dr. Engali's picture

Successful economic and political union......... LOl.... if the union was successful then they wouldn't want to leave it........ idiot.


They will talk this thing up like it's too close to call in order to keep people on edge, but in the end the only thing that matters is who counts the votes and we all know how that turns out.

NoDebt's picture

Well, it's successful for SOMEBODY, just not the Scots.  Who might it be?  Hmmm... nobody comes to might right now.

Lux Fiat's picture

Who currently gets the oil revenue, and in what percent?  Although, as others have noted, their oilfields are in decline.

Matt's picture

How DO Scots count votes?

Do they use electronic voting, or punch cards, or do they do like in Canada and have checkmarks on paper reviewed by human beings?

How the votes are counted is a pretty important factor.

Ethelred the Unready's picture

Would it be Scotland's oil - or would it be the Shetland Islands oil?

Of course, if the Shetlands stuck with England, the Scot could invade, even rename the place to something that ryhmes with "Malvenes".

Richard Feynman's picture

I hate to state the OBVIOUS but strategically your all missing the MORE important point;

1.) That the Northern Ports are some of the only deep water ports for the British Navy in the UK colony's. The kind of places you keep your top-secret NUCLEAR SUBMARINES; and your entire fleet of Naval Vessels;

2.) Yes, 99% of UK's real VALUE intrinsically comes from NORTH-SLOPE OIL; if they lose that then they become a PARASITE in the middle of shit; something quite like Israel;

I suggest that LONDON will kill everyone in Scotland and Ireland, before they give up this kind of power.

This would be like AIPAC-USA giving up control of the FED-RESERVE FIAT-TO-INFINITY printing press; You all can talk all day long; but None of this shit will happen until USA, ISRAEL, and LONDON are NUKED; and Sealed in GLASS.

marathonman's picture

Even with Scotland, UK is a PARASITE in the middle.  Without it?  From all the commentary about what a drag on UK Scotland is with all the transfer payments you'd think that UK would be better off kicking Scotland to the curb.  It's all quite amusing to me.  I say vote YES for independence and stick a big fat finger in that Bank of Englands face.  They've been ripping the world off for what 300+ years now?  Tell them to bugger off and have done with it.

Kirk2NCC1701's picture

"Surely you jest, Mr. Feynman"

MalteseFalcon's picture

Either that or Scottish independence isn't going to mean what people think its going to mean.  The negotiations (behind closed doors) will continue long after a 'Yes' vote.

Huckleberry's picture

David Folkerts-Landau is a rambling piece of shite. But I digress.

Scotland will not be allowed to leave. It would cause a cascading effect across europe.

The vote will be 50.3% to stay part of the british isles. Diebold.

desirdavenir's picture

actually, that may be the plan : sacrifice the UK to break the EU and leave the US the sole "western" leader.

kaiserhoff's picture

OT, but in other conspiracy and rigged market news, Miss New York won the Miss America crown for the third straight time.

I make the odds 50 to the third ~ 12,500 to one..., ignoring the territories and Barry's 57 states.

OK, Yellen does worse over her morning prune juice, but the Misses are easier on the eyes;)

BadDog's picture

Scotland a new Switzerland and Iceland combined.  A magnet for capital, technology based on a free and open internet, no Rothchild central bank, hard currency and no NATO ties.

Top priority would be joining BRIC associate states in developing an alternative SWIFT system and securing communications traffic outside of NSA reach.  Much more but that should give them an idea of what could be.  Oh, by the way, fuck the monarchy.

Rootin' for Putin's picture

oh im sure somewhere a rothchild or similar is egging scotland on because they see a nickle in it for them somehow.

Because a new country with oil revenue is like a mule with a spinning wheel. No one knows how he got it and danged if he knows how to use it!