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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BadDog's picture

LOL.  Indeed sir, but we can dream can't we.

Kirk2NCC1701's picture

The trillionaire redshields aren't interested in a few more pounds. They want more power to control the entire globe.

Peter Pan's picture

People might be voting on Thursday, but their vote will not count.
There is little doubt in my mind that the greatest swindle is being prepared by Downing St and the UK intelligence services to have substitute ballot boxes taking the place of real ones. The substitute votes will of course in the majority be for Scotland to remain within the UK.

if anyone thinks I am joking then let me remind them of LIBOR, gold etc.

If I was the party in favour of independence I would be following and staying with those ballot boxes all the way to wherever they are counted and until they are counted.

kaiserhoff's picture

Hain't they got no voting machines, Mate?

Even the Darkies in Philly gots voting machines.  Saves Laybah;)

Peter Pan's picture

The result will be rigged regardless of whether they are using machines or ballot boxes. Computers are easier to rig as one presidential hopeful in the USA found out a few years ago.

NoWayJose's picture

It all comes down to money - and with the oil revenues Scotland is probably sending more money 'to' the UK than it gets in return. When crunch time comes to the US debt, and given the polarized political state we have, it seems plausible that there could be a similar vote in the US between 'Red' states and 'Blue' states over the inability to continue paying out benefits and entitlements using nothing more than more debt.

Ghordius's picture

"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."

there is another "fixed" currency: gold

Sorry, but the argument above is pro-fiat, pro-elastic-currency and pro-inflate-the-monetary-base-to-escape-all-problems. In short: Keynesian

is there any anti-EUR argument that ultimatively isn't Keynesian? If yes, I haven't seen it yet

Until then, you are making the ECB a compliment, by stating that it's monetary regime is having a similar effect to what a gold regime would. Remember that the core of the Austrian School's teaching is that after overshoots, readjustments follow... unless you re-inflate to the max, or devalue, which is the same

So I ask: if the eurozone was using gold, would you trot out this very same argument? IMHO, it looks like you would, except that your call for devaluation would be... impossible to follow

marathonman's picture

Saddam Hussein and Ghadafi wanted to trade oil for gold.  Look what that got them.  Scotland won't be treated any differently by the Vampire Squid.

falak pema's picture

Q-daffy wanted to exchange oil for ukrainian women, like the Barbaresque pirates of old.

I think that they hated him most for that, the Westerners, who took him out.

They could not stand his love for white femen in his own harem. 

Sarko told him so : I don't want you shaking, rattling and rolling your tent all night long on the Elysee lawn. 

Obammy was scared he'd do the same thing on the WH lawn. Can't have that.

Prefer a drunk Elstin to a shaggy dawg Q-daffy.

No Siree! 

Scotland's best bet is to unloose the Loch Ness Monster, heading south.

True leverage.


free_lunch's picture

"whose fixed currency means the only devaluation possible is internal, read crashing wages."


The main difference between devaluating the currency and internal devaluation is that with currency devaluation every citizen including the rich loses wealth, by internal devaluation it is only the working class that gets screwed.


The issue with the EUR is not that it is FIAT.  It is that it is FIAT created out of thin air as debt owed to the private banking cartel that owns the ECB. Instead of debtfree public money created by a public owned and controlled public central bank like it should be.



Ghordius's picture

free_lunch, with this "...FIAT created out of thin air as debt owed to the private banking cartel that owns the ECB..." argument,

you are taking a valid argument against the FED... and misusing it against the ECB. because the ECB's owners are national banks. I'm using the term national because they are (mostly, then sometimes the fact is hidden by "pro forma" shareholders like provincial banks, which are owned by provinces, for example the German Landesbanken) owned by the countries (including that one shareholder that does not use the EUR, the Bank of England), and so by the public

this is not true with the FED, which is owned by a cartel of private NY Wall Street banks, which then leads to your argument

free_lunch's picture

Can we vote them out if they are corrupt and work against average Joe to the benefit of the rich? Can we vote them out if they appear braindead f*ckups that can't do anything right?

No? What is the difference does it make then?

Ghordius's picture

in Europe, we can. though not directly, but that's our system (Parliamentarism), which does everything indirectly, through Parliament

this applies too to the personnel, as an example which you can search in ZH: France and Italy had long, long discussions until they agreed on Draghi as ECB prez. And every governor is a political appointee, which makes 18 votes (one from each country) out of (from memory) 24

"work against average Joe to the benefit of the rich?" in Europe? I hope you aren't one of those Americans that calls Europe socialist, are you? Then this is what true socialists believe in, working for the average Joe and protect him from the rapacity of the rich

Mediocritas's picture

Wouldn't get too excited, the North Sea is well past peak (1999) with 40 billion barrels pumped and about 20 billion remaining (and production costs grow towards the end).

The UK lost any significance as an energy producer over a decade ago. The decline of production is rapid (see charts linked below). All that's left now is to make the sign of the cross and start fracking. Yes there are rumours of secret mega fields that the Scots are sitting on, but I'll only believe it when I see it.

Reality check from 1 year ago: http://www.theautomaticearth.com/energy-is-a-power-game-2-britain-is-los...

Fresh update here: http://euanmearns.com/for-a-few-trillion-barrels-more/#more-4504

A lot of hot air going around. The UK is screwed energy-wise with or without Scotland. The Scots will be slightly better off alone (from an energy standpoint), but it's likely to be a messy divorce.

Bear in mind that the real enemy is a small % of sociopathic banksters and effective independence means getting away from their influence. Scottish independence is no such thing. Banksters run the UK now and banksters will still run an independent Scotland so it's pain for likely no gain.

McCormick No. 9's picture

As long as RBS keeps its charter, the whole thing is just a fucking show.

Winston of Oceania's picture

RBS will move HQ to London Town if the vote succeeds.

conscious being's picture

What about a step in the right direction? Could it be a step in the right direction?

The Abstraction of Justice's picture

England still has a lot of coal and beyond coal, reserves of thorium. 

intric8's picture

Yo Scotland - be on the lookout for a jewish-looking woman with a possible nosejob who might be handing out cookies for "No" votes. Please prove to the world that your heritage is of higher intellect than the ukranians.

Avoid her, or ice-bucket challenge her against her will to your leisure.

gatorengineer's picture

I up voted you but I bet your post gets pulled, cant use the J word here any more....

intric8's picture

well alright... henceforth the code word for j is "chinese". I'm sure they'll have no probs with that.

How hypocritical our modern world is

Rakshas's picture






........ OK I think I'm done anyone else want to play my silly game??

Alpha Mike Foxtrot ...... baker 26 out




intric8's picture

Precisely. Every other race on earth is no prob. Except whites. Hunting season is open

GetZeeGold's picture



If you're a white Marine in a Mexican prison......you're pretty much screwed.


We'd get him out.....but we ran out of terrorists to trade.

Son of Captain Nemo's picture

well alright... henceforth the code word for j is "chinese". I'm sure they'll have no probs with that.

i8 ;-)

Their isn't a place on this earth where the "Ashkenazi weed" hasn't stepped foot to set up it's usury "license"...

Ever heard the expression "Jews of the Orient"?!!!

gatorengineer's picture

Are they using Diebold voting machines?  If so no worries

forwardho's picture

As a general rule, anything which that miserable, avericious POS George Soros says is bad, is probably going to benefit the common Man.

The EU is in the process of being compleatly overun by impoverished third world immigrantes. The immigration strategy seems to be a sort of Cloward and Piven on steroids.

Self determination? How dare they.


q99x2's picture


BitCoin Last Price $480

wstrub's picture

NEW WORLD ORDER......................on the way!

trueFacts's picture

Forget the oil, ... please address the important issue: will it be cheaper to buy Lophraig and Lagavulin before thursday or after thursday????

diogeneslaertius's picture

oil = assets to be seized in payment for EU accession (Italy and Cyprus in one)

The Shootist's picture

It will be a crushing blow when the rigging establishment votes for the status quo.

Do it Scotland, you won't do it...

Government needs you to pay taxes's picture

A free Scotland would make a wonderful FATCA-free banking center for zee goldstackers.  Position to be like Switzerland, circa 1950, with oil and scotch.  Go Scotland!

d edwards's picture

90% of the oil? No wonder everyone from the Queen on down are practically wettting themselves!

Scotland also makes/exports thier wonderful Single Malt Scotch.

Also St. Andrews etc. as the birthplace/mecca for golf tourism, and tourism in general.

Looks to me like England might collapse without Scotland!


Quantum Nucleonics's picture

Most of Scotland's oil is actually near the Shetland Islands, which will probably push to remain part of the UK if the Scots vote for independence.

cassotto's picture

i see two charts

the tower's picture

Jeremy Paxman believes it is a scandal that British citizens not living inScotland are denied a vote in Thursday's independence referendum.

Yeah right, the UK should have a say in what happens to Scotland... Like the EU should have a say in letting the UK leave the EU or not, LOL!

To boot:

"The trend in the modern world is towards an erosion of national borders. If it turns out the Scots really do want to create a new one, then let's have a proper frontier, with passport controls and barbed wire and Alsatian dogs and watchtowers on the banks of the Tweed."

The man is a nazi.

The Brits are a funny lot, still can't let go of their aspirations of being a superpower, but settling for the US's lapdog position at the same time.


Winston of Oceania's picture

"The Brits are a funny lot, still can't let go of their aspirations of being a superpower"

Sounds like some russians I know...

Ghordius's picture

LOL, +1. There is indeed this strange argument that all British citizens should be able to vote about it. Now, imagine they would, and Scots would vote Yes while the English, the Welsh and the Northern Irish would vote No. What then?

Though some of the discontent has a simple reason: many Scots live in England/London, and are so barred from this poll. Meanwhile, every EU country citizen living in Scotland is allowed to vote (!)

I, too, find this thinking that "there must be animosity between England and Scotland after a Yes" a bit on the nazi side. Yes, Brits are a funny lot, but they can be very, very civilized among themselves. I don't see any reason why they can't divorce amicably, with just a few (inconsequential) breathless news headers from time to time

as a reminder: half a million Irish live in the UK, mostly in England, and they are even allowed to vote for the Westminster Parliament, and are treated as full citizens

no reason why an independent Scotland should not do the same with rUK citizens, and Westminster returning the favour, for example

The Abstraction of Justice's picture

The reason they don't give we the English the vote is because we could want indepdendence from Great Britain ourselves. I would be the first to vote for independence from Scotland, as must most patriotic Englishmen.

dbTX's picture

THey have all the single malt leverage as well

ToNYC's picture

Long Scotland, Short England, FtUK.

Son of Captain Nemo's picture

Put your Au frame arond this read.

Might as well say it...

Prepare thyself for a "9/11 Anniversary" redux moment as a nice diversionary tactic.

I've never seen the bloated living corpse of George Soros look so ashen gray with the statement(s) he made about Scotland's abdication from the Mother Ship last week...

These guys are fucking desperate!

Toolshed's picture

When a scum sucking banker tells you "If you do that, you are making a huge mistake", then you damn well better do it, or you are making a huge mistake.

intric8's picture

A request, por favor - youtube video link of a woman lambasting the rest of scottish parliament about how they suck up to obama and the west. I forgot her name, but ZH would LOVE her eloquent, grinding speech

Barnaby's picture

So it's still shite bein' Scottish?