LONDON, Sept 8 (Reuters) - The world’s major banks have scrambled to take seriously the prospect that the United Kingdom might be on the verge of a split as a pair of polls in the past week pointing to growing support for Scottish independence.
Below are highlights of the advice banks have given to their clients in a raft of research notes sent out in the run-in to the vote on Sept. 18.
- “Be afraid, be very afraid.”
- “The implications of a yes vote would be huge, and are magnified by the sense of institutional unpreparedness. A ‘yes’ vote could easily derail the UK economic recovery.
- Could cause a “destabilizing crisis” in the banking system and at best leave the rest of the UK with an unstable currency union during talks on the new fiscal and monetary arrangement.
- “There is now no question that the momentum is now all with ‘yes’.”
- Near-term consequences of a “Yes” for the Scottish economy, and for the UK more broadly, could be “severely negative”. In the long run, “little reason why an independent Scotland could not prosper: there is no evidence to suggest that smaller countries are richer or poorer, on average.”
- Highlights risk that uncertainty over whether an independent Scotland would be able to retain sterling could result in an “EMU-style currency crisis” for the UK.
- “Significant risk” of bank deposits fleeing Scotland within days of a Yes vote.
- Investor concerns would likely focus on currency issues, EU membership and future Scottish economic policy. This could deter investment in Scotland from foreign and British companies.
- The increase in the net debt-to-GDP ratio for the rest of the UK if Scotland refuses to repay its debt is “relatively slight” and potentially a price worth paying for avoiding a dysfunctional monetary union. Scotland would pay more relatively for issuing its own debt as a result.
- The forex market’s single biggest player made sell sterling its trade of the week on Monday. A “Yes” vote could drive the pound to $1.56 or lower.
- “With the lessons of the euro zone debt crisis still fresh in investors’ minds, a currency union (after a “Yes” vote) may weaken sterling in the same way it weakened the euro.”
- Concerned that a Scottish exit will raise the chances of Britain leaving the EU within years.
- Yes vote would prevent the Bank of England from raising interest rates, encourage “financial fragmentation risks across Europe”.
- Negotiations on debt and North Sea oil to fuel volatility.
- “Yes” voters tend to underperform their pre-voting polls by a significant margin as minds change in the privacy of the voting booth.
- Lenders would likely ask for risk premium for borrowing to newly independent nation.
- A quick 5 percent move, towards the high 0.80s for euro/sterling, is certainly possible after a Yes vote, and, with this, a move to the mid-1.50s against the dollar.
- Yes vote could knock 10 percent off value of sterling.
- One of the few banks to focus earlier this year on the potential that Scotland might not take on its portion of UK public debt.
- Bank’s economists chiefly concerned on Monday by the prospect of Scotland being refused EU entry and the rump UK following it out after a 2017 referendum on membership.
- “Market complacency on Scotland is shattered.”
- Scotland leaving the UK would make the UK leaving the EU considerably more likely, which could reduce potential GDP growth by as much as 0.5 percent per annum.
- Sterling could drop as much as 5 percent against the dollar after a Yes vote.
- A transition to other currency arrangements would be complex, with “sterlingisation” or a fixed exchange rate likely to put upward pressure on Scottish interest rates.
- Still expect downside for the euro against the pound, but it “could be a bumpy descent” into the vote.
- Scottish bonds could yield between 50 to 150 points more than AAA gilts, depending on how talks on independence pan out.
- In an “unfriendly outcome” of such talks between London and Edinburgh, the 10-year gilt asset swap could cheapen by 20 basis points, consistent with a 1-notch credit rating downgrade.
BANK OF AMERICA-MERRILL LYNCH
“If elevated uncertainty receded fairly swiftly, the effects of any lasting decline in the currency might be the dominant consideration, potentially adding to the case for the BoE to begin raising rates.”
- Sterling should not lose more than 4 percent on a trade-weighted basis over the longer term in the event of Scotland voting for independence.
- If Scotland issues its own currency, it could face similar problems to the euro zone, in the respect that the prospect of leaving a “strong” currency for a new and potentially “weak” currency could lead to large scale runs on the banking system. (Reporting by Jemima Kelly, Patrick Graham, Anirban Nag and Jamie McGeever)
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