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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Racer's picture

The cherry on the top if Scotland were to vote YES, would be that the banks would clear off. That alone is a great incentive.

Jimmy Twinkle's picture

Re Mediocratis views on Scotlands energy future; time for your lesson in conversational Glasgwegian . Aawaynwashyerbaws.

Scotland has huge fossil and renewable energy potential.

1. There is still huge reserves in the North Sea. Westminster knows it but theyre hardly gonna shout it from the rooftops. David Cameroon was up in Shetland a while ago for secret meetings and the walls have ears.

2. Aberdeen's oil and gas technology is world leading in the field and continues to eek out profitable yield from diminiuished fields as well as selling on that knowhow around the world. As oild continues to deplete surely the price will match the aggregate cost of extraction so extending fields. Yet another example how Scotlands naysayers have turned North Sea oil into a setback fro Scotland???

3. Scotland is Wet hilly and windy. We still have huge potential for hydroelectric and wind.

4. The West coas of Scotland is geographically rich in potential tidal power sites. 

5. Through years of mismanagement Western Scotland has a huge areas of completely denuded land that once was the Great Forest of Caledon. biomass potential is huge.


Mediocritas's picture

Show me the part where I said Scotland would be worse off from an energy perspective (I said the opposite).

Now explain to me the Scottish plan for getting free of The City's banksters (I ain't hearing anything). Where the plan for a radically different banking system?

All the energy in the world doesn't mean shit if foreign banksters have you by the deriviballs. I do hope the vote's a YES because at least with independence there's a chance to do something, I just hope there's actually a plan that won't fuck things up worse than before.

Best of luck, no sarc.

kchrisc's picture

Considering how governments and their bankster masters react to threats to their power and flow of lucre, can their be any doubt that this whole thing has been engineered, or at least allowed to progress by the banksters?!

The banksters have planned the outcome to fit their current agenda: It is either a sheeple distraction that will have a "no" outcome or a "yes" to help formulate more conflict in Europe, and more indebtedness.

An American, not US subject.


"Save yourself, guillotine a bankster."

headhunt's picture

"Save yourself, guillotine a bankster politician."

Banksters cannot do shit without the politicians they hold in their pockets.

kchrisc's picture

I was being narrow in scope for effect.

I completely and truly endorse guillotining them all--pols, crats and their bankster masters.

An American, not US subject.

Infinite QE's picture

Anything that shoves a fork in the eye of Soros/Rothschild, has to be good for the globe. All for more decentralization and stockades for those who oppose it.

All is chosen's picture

A UDI by Shetland is needed.

Please Note: Most of the oil does not belong to Scotland. 


FieldingMellish's picture

If "Yes" wins, I suspect a movement by Shetland, Orkney and the Western Isles to claim the oil as their own and keep the revenue there. Its East Ukraine all over again.

Treason Season's picture

The consensus here appears to be the Yes vote will never be allowed by TPTB to succeed. But what if the big money is positioned for the opposite. Whocouldofseenitcoming?

Fix It Again Timmy's picture

Scotland - Don't call home....It's time to give the Queen a cunt punt!....

boodles's picture

We're missing the important POWER link, here.  The reason the left/socialists don't want Scotland to leave England is that only ONE of scotland's MPs is conservative/Tory.  If Scotland breaks off then England will be politically conservative ... forever. 

The conservatives in England miss the power and prestige of the ol' empire, so they're offering their sincere support for union.  But behind the scenes, the conservatives are rubbing their hands with glee.  After Scotland breaks off, its a hegemony for them.

Assuming conservatives have gonads -- a big assumption -- they'll deal with the Muslim problem, perhaps with deportations, as well as cut down the huge free-shit army.  England could be stronger if conservatives act like conservatives. 

The Abstraction of Justice's picture

As Galloway said on Russia Today, he wants communism for Scotland, and he cannot have that without imposing communism on England first.

FieldingMellish's picture

Galloway: Communism under Shariah Law. Sounds like absolute heaven...

GeorgeHayduke's picture

Wall Street anf Banker owned US War Machine is getting hard thinking about a new, small, independent country with oil for the taking.

johnjkiii's picture

Great acadmic exercise but the truth is that The Peoples Republc of Scotland will be just one more socialist nanny state made temporarily solvent by gettng all of its own oil revenues. We see how well that works with Venezuela and nothing written changes the fact that whether it stays within the UKs socialist paradise or creates it own little cesspool of steaming left wing slop, it will - one way or the other - become just one more failed economic state. The Scots are only selecting which poison they swallow.

americanspirit's picture

I have just read a very interesting book from 1974 on the history of Chinese Intelligence, and several chapters are devoted to the covert but very coordinated and VERY well-funded role of the Chinese in promoting the European Union movement. Since the book was published so long ago there is obviously no discussion of what role China may be playing in the EU today, but my guess is that once their efforts to promote the EU were successful they would be doing anything today to see that it remained intact. The role of the Chinese in European politics is something one never hears about - which is in itself suspicious. You have to wonder how many of the high-level bankers, businesspeople and bureaucrats trumpeting the EU line are in fact paid agents of Chinese Intelligence. They certainly were in the 1970's. And you also have to wonder how much of the disinformation and smear campaigns against those who oppose the EU and, in the case of this article, how many of those who support Scottish independence, are also targets of covert billions of Chinese money being directed at manipulating the European sheep.

Ghordius's picture

what is the title of the book? btw, 1974? do you realize that basically every single "trumpeted EU line", or "EU-ideology-item" was already part of the discussion by the time of the Treaty of Rome in 1958? Where was China, then? Further, who engages in "smear campaigns against those who oppose the EU"?

do you realize that there is a different smear campaign in place, very tightly focused on certain segments of the American public, which uses the EU and the EUR as an example for "all that is wrong in the world"?

meanwhile, do you know that Chinese money can extract much more "bang" for the "buck" in American politics? and it does. just note where Chinese oligarchs send their children to study and live

americanspirit's picture

Hello Ghordius - The book is "The Chinese Secret Service" by Richard Deacon, ISBN 0-345-24901-1-225. If you would like to know where Chinese Intelligence was and what they were doing in Europe in 1958 and well before that please read this book. Also their use of disinformation, blackmail, smear campaigns, and the occasional assassination of anti-EU players is very well documented. This is an extensively footnoted book - it should satisfy your very justified call for verifiable facts. And by the way this book goes back several centuries to examine the evolution of Chinese intelligence methods. I think you would find it very interesting - given the depth and acuity of your posts here on ZH.

Yes I do realize the origins and purposes of the massive anti-EU propaganda in the US. The people behind this may think they are being clever and hidden but they are all too obvious. What I was saying in my original post in this thread is that, given the Chinese activity in support of the development of the EU, I wonder what they are doing in the face of threats to the EU, and why we hear nothing of such activity. My guess is that a LOT of Chinese money has been used to buy influence in all the high places and that is why we hear nothing at all.

And meanwhile, yes I do realize the extent, and purposes, of the Chinese "invasion" of US universities. It has actually been going on since the 1950's, but in recent years it has become a massive information collection effort. The book referred to above makes the point that there is a huge difference between Soviet (Russian) and Chinese intelligence gathering approaches, with the Chinese preferring to simply suck up every bit of easily available information and then to put the pieces together with clever analysis. This way they avoid the liability of having covert agents who illegally steal secrets and frequently get caught in their illegal acts - like the Soviets/Russians. The Chinese intelligence eyes and ears simply examine every possible piece of openly available information. A good friend of mine, retired after many years in the business, reckons that virtually 100% of the Chinese university students and faculty members in the US are working directly for Chinese intelligence - not spying, just collecting readily available information and forwarding it for analysis. Ever wonder why Chinese at trade shows take every single piece of free literature that is available?

Ginsengbull's picture

So they are paying for free information?


Doesn't sound like the Chinese I know.

Porous Horace's picture

Scotland has oil? Uh, oh... get ready for the president's "AlQaeda in Scotland must be stopped" speech, coming to a TV near you.

Armed Resistance's picture

Now it's ISIS, or the the spawn of ISIS, or whatever the newest CIA bogeyman is...

livemike's picture

Oh god, please tell me that's not possible.  On the other hand don't, I won't believe you.

Seal's picture

AND an independent Scotland can stop illegal foreign spying by  GàCHQ

Dingleberry's picture

I don't mind if the Scots bail.

But what concerns me is so many supposedly erudite and learned bitchez on this site actually cannot grasp (or apparently have forgotten) that unless a nation controls its own currency, nothing else matters.

I see no one addressing this, other than platitudes and guesses about the future.

Does Scotland want to be Germany's lap dog and use the Euro, or remain under the criminal class in London?

john milton's picture

yeah, they should vote for yes and lease a military base for putin for insurance that no minor britan invade

herohedge's picture

Scotland will make maybe $50 billion on their oil yearly, for a population of 5 million. That's $10,000 per person. Not too shabby. Freedom!

FieldingMellish's picture

Not even close. The UK produces less than 1m bpd. you are off by a factor of 10... at least. The net benefit will probably be about $1000 per person annualy which is probably less than they currently receive from London and this is a declining resource in its dotage. Output is dropping by 10% every year.

TabakLover's picture

TPTB never lose a vote.  Can't lose this one either because the Catalans are watching.   NO by a hair.

tarabel's picture



I just have to laugh at all the posters who think that Scotland is going to turn itself into some sort of oil-rich Atlantic Hong Kong as a result of this referendum.

Why are the Scots (in effect) truly revolting?

Because they have become convinced that they are not getting their fair share of the goodies bestowed by Parliament. Once they have direct control of the money pipeline, laissez les bon temps rouler, or so they think.

Jano's picture

I wish they cut the rope to UK.

Fíréan's picture

"45" written boldly upon the banner held high in his hands, the ghost of  the little Italian fellow Bonnie Prince Charlie has been seen once again roamin' in the gloamin' !

pashley1411's picture

In the absense of an external military threat, the logical economic and social unit is the city state.   

pippi68's picture

When the TBTF bank executives start shitting their pants and painting doomsday scenarios, you know you're onto something that will likely help the majority of your countrymen.

Quantum Nucleonics's picture

The Scots might find they are screwed when they discover that most of "their" oil actually belongs to the folks in the Shetland Islands, who are not super fond of the Scots and will probably end up remaining with the UK.

livemike's picture

" a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard"

Returning to the Gold Standard wasn't a mistake, returning at a blatantly unrealistic exchange rate was.  Inflation under fiat currency had pushed the value of the Sterling well below what it was when the GS was abandoned, but Churchill was more concerned with nationalistic bullshit than economic reality.  He wanted a pound that would "look the dollar in the face".  Instead he got an overvalued pound that everybody wanted to swap for anything but British goods.  It should have been obvious that this was doomed by the need to keep borrow lots of gold short term to make it look like the pound was sound.  His moronic decision wasn't the only reason for the Great Depression, but it was a big one.  Churchill had previously fucked up the Dardanelles campaign, lengthening the Great War* by years.  God I hate that fuckwit.


*  No I don't know what was so great about it.