Poll: Who will triumph in the Scottish referendum and what will the consequences be?


Scotland The Scottish independence referendum, planned for September 18, is causing quite a stir on financial markets. The uncertainty regarding Scotland's political and economic future, the currency issue in case of a breakup and the impact on the pound is unnerving investors who closely observe opinion polls trying to assess the risks.

Last weekend there was a surge in votes in favor of Scottish independence, but the latest survey revealed an increase of support for the “no” movement, possibly as a consequence of former PM Gordon Brown's 'Better Together' campaign launch, promising greater powers for Scotland should it opt for remaining part of the UK. Will the independence leader Alex Salmond manage to convince voters that breaking away would not mean an economic disaster for Scotland? There are still six days left to the referendum, during which the scales can turn either way.

We have asked several analysts to present their opinions concerning the possible outcome of the vote and the implications of a "yes" and a "no" result. Some of the experts have presented their projections on the consequences of both outcomes, while some were firmly convinced that only one is possible and worth commenting on.

Below you will find them all, divided into those focusing on a "no" result and those commenting on the consequences of a vote in favor.

WHAT IF IT'S A 'NO'?

Jamie Coleman - FXBeat Editor: 

Here's why I think, when push comes to shove, Scotland will ultimately vote no:
The surge in the polls for "yes" to independence allows 10 days before the referendum has already allowed the UK government to add some sweeteners to make staying in the UK more palatable to those who would like change but are not willing to go it alone. It also forces those with weak opinions to confront the ramifications of a "yes"vote and not purely get swept up in an emotional surge. Now there is truly a debate underway.
Recent history has shown that more times than not, the forces of the status quo are difficult to overcome. Quebec ultimately stayed part of Canada, France and Ireland stayed in the euro (Ireland, after being given a second chance...).
Change and independence sound great in theory, but they are pretty scary in practice. When push comes to shove, I think Scotland stays in the UK.
Markets will be very choppy until the 18th. If you are able to buy options, that might be a safe way to play. Some 1.6500 two week calls, perhaps? They won't be cheap, but they limit your downside and the risk of being stopped out of a good position on the release of some poll. 

Jameel Ahmad - Chief Market Analyst for Forex Time (FXTM):

I am still expecting an overall “NO” vote in the Scottish referendum, although I do admit my surprise at how much momentum the “YES” camp gained during such a short period of time.

I also feel that an overall “NO” vote has not yet been priced into the market, despite the GBP rebounding in recent days. An upside break towards the high 1.65s should be on the cards, bearing in mind this is where the Cable was trading before investors became flustered by the “YES” vote gaining momentum.

I feel that the recent warnings over rising food prices, corporations hinting that they would move headquarters away from Scotland, alongside unanswered questions over factors such as currency should sway voters towards the “NO” camp.

Yohay Elam - Analyst at Forex Crunch:

There are still higher odds of a No vote in the Scottish referendum, but it isn't fully priced in. The result would likely trigger a sharp rebound in the pound, as the current uncertainty has weighed heavily and overshadowed other GBP related headlines. A sharp bounce to 1.66-1.67 can be expected between the release of the results and the end of the trading week. In the following week, we could see some minor impact, but things will quickly return to the previous reactions to central bank messages and economic indicators.

Alistair Cotton - Corporate Dealer at Currencies Direct:

If the Scots vote No next Thursday it will not only be Westminster breathing a sigh of relief. The FX markets are panicking even more than the politicians as the prospect of an end to the Union draws closer. Foreign investors will not stand idly by with the prospect of a large-scale fall in the pound on the horizon – they have to protect themselves by moving funds elsewhere.

The poll over the weekend showing both camps neck and neck saw a stampede of investors heading for the exits and a four cent drop in sterling against the dollar. Then yesterday’s poll showing a six-point lead in favour of No saw sterling rebound by a cent.

A vote for Scotland remaining part of the Union will see the outflows from Sterling reverse and we should end up back where we started, if a little shaken up by the whole ordeal.

Alberto Muñoz, Ph.D. - Forex Analyst at FXstreet.com:

There would not be any remarkable consequence: everything would remain the same and the Pound would bounce back to previous levels, I would expect a test of the 1.6540 resistance (former support) in GBPUSD as there's a massive short squeeze. But we shouldn't forget that after the referendum, Westminster politicians will have to give up and transfer more tax powers to Scotland in any case. Therefore Scottish nationalism will preserve its influence so uncertainty isn't over yet.

Ilian Yotov - President and Portfolio Manager ATFX Currency Management:

The uncertainty surrounding the Scottish independence vote has been a significant drag on the GBP and we will probably not see significant GBP strength until the vote on September 18 is behind us. Our forecast is still for a "no" vote, despite of the recent polls showing 51% for the yes camp. There is a significant amount of undecided voters that could sway the vote in either direction, but we feel that the most likely direction will be toward a majority for the "no" voters. Provided that the vote is not a "yes" (which will really complicate things for the U.K. and its currency) the GBP would be able to clear a major obstacle to its future appreciation and could stage a big relief rally. On the other hand, an independent Scotland could send the GBP well into the $1.50's against the USD.

Gus Farrow - FXStreet Chief Editor and analyst:

Often those focused on radical change have the loudest voice. However, despite the excitement, on polling day I expect the complete lack of economic planning or transparency of the Yes team to resonate strongly with the ‘don’t know’ camp, who are estimated to be between 6-23% of those polled. I say No with a last minute swing to 57% of the vote.

Craig Drake - FX Analyst and Editor FXStreet:

While on the face of it, there is no reason an independent Scotland couldn’t be successful as a deregulatory, low tax competitor to England with all of the time zone and common law advantages available in London, for political reasons it is unlikely to achieve this. A newly independent Scotland would be led by Alex Salmond on a wave of nationalism and isolationism. Salmond is an old fashioned “Scottish jobs for Scottish workers” protectionist and would be likely to nationalise anything that moves. And those that could would quickly flee to more free economies (read: England)

A newly independent Scotland would also be a huge uncertainty, and a chance that few businesses would be likely to take and Salmond has done very little to persuade those businesses otherwise. I’ve heard from business owners in Scotland who have bought smaller entities in England ready to reverse-merge into them should the Scottish independence vote go ahead. We have seen this week that RBS has said that it will relocate its head quarters to London in the case of an independence vote and it is likely that many will follow.

Sadly, it is likely that a Scotland under Alex Salmond would become a very poor country very quickly and following independence there would be very little political support for England to come to its aid.

Ironically, the best chance of independent Scottish survival would be for it to go running to Brussels and beg for a place in the European Union. But the EU would be slow to accept another Ireland-type risk without a significant surrendering of powers. So the Scotland that had so recently split from England – a country with which it had a long and rich history of shared ties and values – would instead find itself being told what to do by Brussels.

Bill Hubard - Chief Economist at Bankor.com:

A ‘NO’ vote matters as well. A close vote would keep alive the chances of a second referendum in 5-10 years, keeping uncertainty elevated. A ‘NO’ vote would also mean more devolution, with additional powers for Scotland probably kick-starting changes to UK regional governance.


In the long-run, policies matter. In principle, Scotland can function well alone or as part of the UK. It may use independence or devolution to pursue more ‘growth friendly’ policies. But if it uses any extra powers for policies that scare businesses away, it will be worse off. These are slow burn issues, however.


WHAT IF IT'S A 'YES'?

Przemysław Kwiecień, Ph.D. CFA - Chief Economist at XTB Poland:

The biggest consequence of the "yes" vote is uncertainty. The people of Scotland will be asked if they wish is to separate from the UK but there will be no asterisks attached. And there should be plenty. First, it is unknown how much of the assets and debts would the new country inherit, in fact even the process of deciding it remains a mystery. Furthermore Scotland can be expelled from the EU. It is unknown if it can (or wants) to retain the pound or how would the monetary policy be decided. Huge question marks over key economic aspects mean both a high likelihood of chaotic decisions and skeptical business pulling out of the country or at least freezing investments. Suddenly, the economic revival that stood behind the GBP rally in the first half of 2014 might be gone and a lack of real wage growth that started the correction on the currency might be the least important issue.

Sure, it may all never materialize, it’s just a single poll and the GBP may end up being a great buy at the current rate. But buying it just now seems to like giving up your fate to the fortune-teller.

Alistair Cotton - Corporate Dealer at Currencies Direct:

We can expect at least a 5% drop in the pound in the face of Yes vote – and it could be considerably more, potentially 10% or greater.

The prospect of protected negotiations will create a period of volatility in exchange rates, bonds and equities, which will continue until concrete decisions over debt and currency are made. Markets dislike uncertainty, so negotiations around the key issues would need to proceed swiftly and decisively – which seems unlikely, currently, but the financial turmoil a Yes vote may unleash will certainly focus minds on both sides of Hadrian’s Wall. This will then impact on economic recovery as uncertainty will affect forward-looking drivers of growth like business investment and consumer confidence. If the separation hits businesses and consumer confidence, then an interest rate rise is likely to be pushed back.

Whatever answer is arrived at for the crucial currency question, it’s imperative it is a permanent one – or at least a very long-term one. Any transitional option would lead to capital flight and be a speculator's dream. Either the currency depreciates and the speculators win big time, or the government manages to hold the peg in place, in which case no money is lost – a classic one way bet. Money needs to be a store of value and the uncertainty that temporary use creates (a transition to what?) would leave a fledgling Scottish state extremely vulnerable.

Jameel Ahmad - Chief Market Analyst for Forex Time (FXTM):

Such a period of political uncertainty in the United Kingdom is very uncommon and investors have clearly reacted nervously over the past fortnight.

Even though the Cable already fell dramatically from 1.66 to 1.60 after the “YES” vote started to be priced in, it’s possible the GBPUSD could decline by a further 10% -15% if Scottish independence is the end result. At the very least, the Cable could find itself around the August 2013 low, 1.51.

This is where the Cable was valued, before the UK fundamentals unexpectedly strengthened and talks about a possible interest rate increase first began. It’s also likely that uncertainty of what the future might bring would prevent investors from purchasing the GBP for quite some time.

Yohay Elam - Analyst at Forex Crunch:

While the odds of a Yes vote have significantly risen in recent polls, a breakup of the union is not priced in. According to bookies, there is a higher chance of a No vote. The surprise will be joined with huge uncertainty regarding currency, EU membership, Edinboro's financial sector and many more uncertainties concerning both sides. The first hike, expected for the spring of 2015, could be delayed. For the British pound, it would mean another plunge, where the low of 1.48 in GBP/USD could come into play. Every following headline regarding details of the breakup would impact the pound for months to come.

Alberto Muñoz, Ph.D. - Forex Analyst at FXstreet.com:

A victory of "yes" in the Scottish referendum would be certainly disastrous for all UK as it would spark a high level of uncertainty about its economy. First of all we have to bear in mind that Scotland represents around 9% of the total GDP, so it's an important piece of the cake. In addition, the Bank of England has already warned that a breakup of the union “will certainly delay any rate hike” as U.K. credit markets will need more liquidity to adjust to the new political reality.

Therefore, an independent Scotland would sink GBPUSD to 1.5900 where it would find some support in the short term, but the extreme uncertainty could push lower the pair in the next months and could even test 1.5700 support level. EURGBP pair would benefit from this situation as it could break the long term bearish trendline and move back to 0.8200.

Craig Drake - FX Analyst and Editor FXStreet:

On the face of it, there is absolutely no reason why an independent Scotland could not be successful. If Scotland has a strong history of financial institutions (modern day exploits of RBS and HBOS excluded). It has the same time zone advantages as London and it could slash corporation taxes to attract businesses from south of the border in the same way that Dublin has attracted the likes of Google. It has the advantage of a common law legal system, and the protections that offers to bondholders. It could deregulate to provide further attractions for businesses formerly domiciled in London.

The sterling argument is a complete red herring. There is no reason why Scotland couldn’t carry on using sterling in an unauthorised fashion in the same way as the Panama use of the dollar. It could be used as a gross substitute currency alongside a Scottish pound, but without recourse to Bank of England credit facilities – an attractive proposition for sound money advocates.

Having a country north of the border that was a genuine tax competitor would also be advantageous for England. It would help to restrain any business-killing tax rises and regulation in England knowing that companies could easily pick up sticks and re-domicile to Scotland.

Bill Hubard - Chief Economist at Bankor.com:

A ‘YES’ to independence vote 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.

But a deal could be reached. We expect that London and Edinburgh would reach a deal on the outlines of a velvet divorce quickly in the event of a pro-independence vote. A long noisy negotiation would drag out uncertainty and the short-term pain, which would suit no-one.

After a hypothetical Scottish vote for independence, London could not have any interest in protracted uncertainty about the status of its currency and its debt. The Bank of England would likely make it plain immediately that it would guarantee financial stability while London and Edinburgh negotiate their future relationship.

Steve Ruffley - Chief market strategist Intertrader.com:

There have been some powerful arguments in the debate over Scottish devolution. I don’t think anyone for a second would have underestimated the passion and emotive arguments that could be made from the Scottish people for independence. Having started out thinking that this would be an easy heads beating hearts scenario and that the Scots would have to admit that staying part of the UK could only be a good thing, I have begun to think that the undecided voters and the weaker no voters may now decide to vote yes.

The reason for this is not that Salmon’s arguments or case for devolution were particularly strong, it was more that Darling, and the rest of the ‘Better together’ champions have run such a poorly constructed campaign. Simply saying that Scotland has no option for currency, no plan ‘b’ is not an argument, it’s a scare tactic. When you are appealing to people to see reason, fear is not necessarily the best way forward. This coupled with the decommissioning of Trident, taking away nuclear weapons also was such an obvious argument that could literally back fire. Who in real terms wants weapons of mass destruction on their doorstep?

The situation now is that no matter is it’s a yes or no vote this will be the equivalent of a messy divorce. If we stay ‘better together’ for the kids, there will be huge animosity on both side. If we split then do not underestimate the pettiness and sheer distain that Westminster will show towards Scotland. I have the feeling that the UK will end up with the house, the kids and all the family friends.

Without trivialising the severity of this, I would see this as a lose, lose situation for Scotland and also people in London. Cable had dropped over the last few month. This has very little to do with Scotland. The GBP is at 6 year highs against the USD, with the world markets expecting the UK the put up rates in 2015 there had been institution buying for years. Now that retails traders hear the news they are all buying at the end of the bull run as the rest of the smart money get out. There can be an argument for the Scotland issue spooking cable but as Scotland know the UK needs Scottish exports (£100bn) in Sterling so the currency is going nowhere.

My other main concern is the amount of business that will leave Scotland. We saw £2bn wiped off Scottish companies yesterday as the yes vote gathered momentum. This is the markets voting with their feet. The other losers will be London. This is the only natural place businesses and well paid Scots will go to. This means more pressure on the frail infrastructure and once again more of a bid coming into the property market. London keeps building and people keep coming, this could be the straw that breaks the camel’s back in terms of London being able to copy with one more influx of ‘foreign’ money.

In conclusion the UK and Westminster have been very lax in both arguments and tactics to convince Scotland it needs to stay within the UK. I believe that Scotland has called the UK’s bluff and will get more power and control regardless of the outcome. I can only see with an aging population and known health risks that their argument of a better NHS, job creation and a wealthier less taxed population doesn’t add up. Economies of scale is the only way to potentially achieve something close to this.

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