Scotland pins its hopes on a coin toss

If the Scottish Yes vote succeeds, there will be painful consequences for both sides should a currency-sharing agreement not be reached.

LONDON -- Flip a coin, and make a bet.

No one in Scotland can say for sure what currency it might use as an independent country.

But inside the nation, views are shifting towards a greater expectation that a currency-sharing agreement with the rest of the UK might be reached. Having tipped polling on referendum opinions in favour of a Yes vote and thrown cold water on the pound sterling, sending it to 10-month low of $US1.6017 overnight, those views will now be pivotal to what happens in the September 18 vote and the echoes in currency markets.

As attitudes firm, more than 2.5 million Scots -- 51 per cent of the population, up from 39 per cent a month ago -- are planning to metaphorically toss the coin by voting Yes, hoping it lands on a side that will leave them luckier.

Whether that Yes vote is their most preferred option is another question. It has wavered in past weeks on Scottish First Minister and Nationalist Party leader Alex Salmond’s dogged reluctance to pin down a preferred alternative option in the face of Westminster’s refusal to contemplate a post-independence currency union. By tying the Yes vote to a vote for a currency union, he hopes to create a mandate on sovereign will that would force Westminster’s hand.

Some polls have suggested for months that up to two-thirds of Scots would prefer greater devolution of powers (beyond current responsibility for education,  transport, health spending, etc) than either independence or the status quo.

But Salmond’s tactic is squeezing Westminster’s hand already.

As the FTSE ended 0.3 per cent weaker overnight, after charting around 1 per cent lower mid-trade, fund managers, for the first time since the referendum was approved in August last year, were having to review their portfolios in light of a serious threat of separation. Bank stocks were particularly hard hit, with RBS ending 1.30 per cent lower after dipping 2.74 per cent, and Lloyds ending 1.8 per cent lower after dipping 2.43 per cent. 

The market’s reaction has scared Westminster so much that, overnight, Britain’s coalition government made the dramatic, last-minute concession of promising it would hand stronger powers (to be spelled out next week) to Scotland via emergency legislation if a No vote went through.

For the first time, this propels the No case beyond sole persuasive reliance on the economic risks of separation. Previously, without a vision for change, it essentially pitted fear, however realistic, against the restlessness expressed by a young man in checked shirt and jeans, who roused the audience at a live leaders’ debate with the question: “If we’re better together, why aren’t we better together already?”

But the government’s drastic step has been made necessary by the vast number of Scots willing to take the plunge into uncertain negotiations, despite having seen at the euro’s woes at close range. 

Their number is large enough that UBS, among others, is now worried about a 'Québécois scenario': a narrow rejection of independence that leaves open a risk of a further vote, with painful implications for banking, gilts, the sterling and direct investment into Scotland.

Alternately, if negotiations go forward on sharing the Queen’s imprinted profile, traders fear an immediate sharp sell-off in sterling, followed by long months of uncertainty over negotiations, with deleterious effects for currency market, corporate investment and bank shares particularly.

After all, having had its euro abstinence sharply vindicated by the aftermath of the GFC, Darling Street is not keen to cede its advantage to the will of a smaller country. Bank of England governor Mark Carney’s technocratic assessment, relying on an assessment of the euro crisis, points out that a banking union and shared fiscal union would be the most critical element of any currency union between Scotland and England. (Industrial differences would, he says, diverge to same level as the US, with the oil sector split on a geographic basis.)

Most likely, this would mean a significant ceding of sovereign power to London, and could curtail Edinburgh’s ability to do things like approve its own budget and tax rates. The inherently fraught nature of those talks suggests considerable pain inflicted on markets before a conclusion is reached, according to analysts.

Were negotiations for a currency union to fail, there would be significant new problems. A Scottish currency would be susceptible to the challenge of a capital flight -- harmful in either direction -- as markets took a view on the long-term value of the new tender. Sterlingisation -- the ‘Panama solution’ of using the pound without permission -- would leave Scotland without a lender of last resort, exposing it to the danger of a possible run on any banks still domiciled there (Why NAB wants Scotland's vote to fail, September 8). The euro, seen as a less likely option due to problems with entry criteria, would tie Scotland to an already struggling currency.

When the Yes voters toss their coin then, a trick of vision may see it glint for a moment in the sunlight. But when it lands that illusion will vanish.

Meanwhile, on the streets of London, there’s a feeling an unfair fate looms on the horizon. “It affects us too,” commuters can be heard to lament, “but we don’t get to have any say on what happens”.

Amber Plum is Business Spectator's London Editor.  @amber_plum