An unexpected lead in the latest poll swaying in favor of the Scottish 'Yes' camp sent a shock through the market, with the pound plummeting and Westminster spinning into a panic.
The latest poll by YouGov disclosed at the weekend shows the Scottish 'yes' camp now having 51% support among potential voters, compared with just 49% for the 'no' vote. This sudden shift in public support for Scottish independence has sent sterling to a 10-month low, with Westminster's top political echelon panicking at the thought of a break-up of the United Kingdom (UK). Unlike the YouGov poll, Panelbase, the UK's online research firm, showed 52% to 48% majority against independence.
Despite the differing samples, the British currency plummeted on Monday morning, trading down 1.20% at $1.6128, after opening Monday's trading session with a gap and falling as low as $1.6102, its lowest level since November 21 last year. More downward pressure on sterling is expected into this and next week ahead of the September 18 referendum, when the Scots decide on whether or not to remain a part of the UK.
In one of their latest notes to investors, Capital Economics analysts said recently that one of the biggest challenges for Scotland, should it opt for independence, would be to decide on its currency and the subsequent monetary arrangements.
The three options on the table are the creation of a new Scottish currency, staying with the pound, or joining the euro currency union, and Capital Economics asserted that "whatever currency Scotland ended up with, it seems likely that sterling would weaken, at least in the near term."
Market analysts at CMC Markets UK see Standard Life Plc (LONDON:SL), Lloyds Banking Group Plc (LONDON:LLOY), Royal Bank of Scotland Group PLC (LONDON:RBS), Babcock International Group (LONDON:BAB) and Weir Group (LONDON:WEIR) as the biggest fallers on the stock market today “as markets start pricing in elements of uncertainty with respect to those parts of the business that are domiciled in Scotland. A lot of this uncertainty stems from concerns about the likelihood of what might transpire in the event of a “yes” vote,” CMC Markets' Michael Hewson wrote in a note today.
When asked about the currency issue during the August Inflation Report press conference, Bank of England Governor Mark Carney said the policymakers have contingency plans whatever the outcome of the referendum. Carney also said the BoE "have responsibilities for financial stability in the UK [and] we will continue to discharge those responsibilities until they change. We'll continue to discharge those responsibilities regardless of the outcome of the vote on September 18."
Back in January 2014, when he visited Edinburgh to give a speech at the Scottish Council for Development & Industry, Mark Carney said that in order for an independent Scotland to remain in the currency union with the rest of the UK, it would have to cede some of its national sovereignty. Also, the rest of the UK and Scotland alike would have to tackle the issues of an economic union with free movement of labor, capital and goods; a banking union; and fiscal and monetary arrangements.
Commenting on the possibility of a successful 'yes to independence' referendum, Berenberg bank's UK chief economist Robert Wood said such an outcome “ could cause some serious short-term pain.”
“Some financial firms may move headquarters and parts of their business south. More importantly, uncertainty about currency arrangements and the status of Scotland in the EU would spike immediately. Long-term, Scotland would be forced into austerity. For the rest of the UK, losing relatively pro-EU Scotland would raise the risk of Brexit from the EU as well as questions what it could mean for the outcome of the May 2015 general election," Wood also said and added that they “still expect a no vote.”
Partly in response to a strengthening of the 'yes' camp, UK Chancellor George Osborne said on Sunday that the government plans to announce this week more detailed information about granting more powers to Scotland if it remains in the union.
But Scottish Finance Secretary John Swinney told the BBC on Monday that "there is nothing new being offered this week. We may well get a timetable but the substance, the actual powers, the things that matter, … there will be absolutely nothing new.”
"The second point is that in 1979 Scotland was told vote 'No' in the referendum and you'll get a stronger parliament and what we got was a Conservative government for 18 years that we never voted for, industrial devastation and no parliament,” he added.
If the Scots decide to go their own way independent of Westminster, they would have to cope with short-term turbulence and increased uncertainty. In the long run, however, just as happened to Slovakia after the dissolution of Czechoslovakia in 1993, there is no reason why Scotland should not become a sovereign and at the same time prosperous nation.
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