The uncertainty over Scotland's independence is gaining traction on the markets. While the impact of a Yes vote in the short-term independence referendum shouldn't be too negative, the long-term implications, such as the repercussions on whether or not England stays in the EU, suggest that the vote could have more impact. wider than one might initially think. For John Philpot, head of European fixed income at State Street Global Advisors, "there are several scenarios that could emerge that could impact not only Scotland but the UK's global positioning and its future direction".
THE SHOULDER TO THE ENGLISH VOTE ON THE EU
Indeed, the British government has already announced a referendum some time ago on whether or not to remain in the European Union, the outcome of which could be determined by what will happen on 18 September in Edinburgh. “If Scotland were to vote for Independence – explains Philpot – the chances of London leaving the EU would increase because Scotland has a higher proportion of Europhiles than in the rest of the United Kingdom”. So a scenario could arise in the next few years where an independent Scotland tries to join the European Union while the rest of the UK tries to leave. “There's a lot at stake for British companies anyway,” says Philpot.
On the other hand, a certain degree of independence had long ago been regained through a major devolution of power in Edinburgh: the Scottish government already has direct control over education, health, transport and tourism. The vote of 18 aims to completely eliminate the remaining ties by making Scotland responsible for everything else too: from defense to trade, from energy to foreign policy.
“If the emotional aspects of the issue are different, the economic ones are even more so – Philpot points out – although there are several reports suggesting that an independent Scotland would have a weaker financial situation (these are Fitch, Citi, Institute of fiscal studies ), others, such as S&P, underline the potential strength of an independent Scotland”. Indeed, the latter rating agency has indicated that it would give its highest rating judgment to independent Edinburgh, even without taking into account North Sea oil and gas.
WHAT FINANCIAL SOLIDITY
In terms of GDP per capita, Scotland is doing well. In 2011 it was the third largest region in the UK, behind only London and the South East. If you add Scotland's share of North Sea output, Edinburgh's GDP per capita rises to 118% of the UK average. "In any case," Philpot explains, "oil revenues aren't such a solid asset for Scotland." as they had been for the Union in the past. The continued fall in production means that Scotland's future financial position is not set to benefit significantly.
Evaluating the situation more conservatively, ie not taking oil into consideration, the financial balance was in deficit in the period from 2008-2009 to 2012-2013, between 13 and 17% of GDP. It is understood that Scotland has a significantly higher fiscal deficit than the UK, of around an extra 5-6% of GDP. Scotland's population is about a tenth of that of the rest of the UK, 5,3 million people against 57,9. It is an economy comparable to those of Singapore, Denmark and Malaysia.
STERLING OR NEW CURRENCY?
“The short-term impact – continues Philpot – is likely to translate above all into a weakening of the pound. Indeed, there is still a heated debate between the Yes and No sides as to whether Scotland should be allowed to use the pound”. The three main political parties in the UK have so far ruled out this option, but the Scottish National Party insists that Edinburgh can use sterling. This is an aspect that will be part of the negotiations if the Yes side proves victorious. “Other events, such as the UK general election in May 2015 and the Euro Referndum, could be more damaging to the pound”, notes Philpot who adds: “Scotland could or could not hold the pound. There are several options for how Scotland might have its own currency, many of them confused by political campaign rhetoric and trivial pragmatisms.
As for UK government bonds, the Gilts, Philpot does not expect them to suffer a significant deterioration in liquidity or an increase in rates of return. “There could be nuances for some issuance by utilities depending on which inflation measures are followed – he specifies – However, CDS spreads are at their lowest level since before the Lehman bankruptcy, with Great Britain (20 basis points) which is the fourth safest country in the world, behind Sweden (16 points), Norway (14 points) and the United States (18 points). “We believe the Gilt market will continue to perform well regardless of the outcome – adds Philpot – but investors should be prepared to monitor the coming scenario”.
SCOTSIE VS REST OF THE KINGDOM
On the Scottish front, an independent Scotland is expected to pay a higher premium to finance itself than the rest of the UK. In any case, from next year even under the current Union, Scotland will issue its own debt allocating the proceeds to infrastructure projects. “It is initially about a loan of up to 2,2 billion pounds – says Philpot – There could be a premium even without independence. But here we have to wait and see what happens."
On the equity front, on the other hand, the situation is a bit different: the comparison between the English FTSE index and a possible Scottish equivalent does not paint a rosy scenario. “On the Scottish front – Philpot points out – there has been a devastating impact due to the performance of Scottish banks. The Scottish Herald has released a study by the London Business School which sought to determine how the 100 Scottish companies currently listed in London would fare. They saw that a pound invested in 'Scotsie' in 1995 would generate £648 while in the 'Rest of UK' it would rise to £1.168”.
