Shifting Polls in Scotland Send Investors Rushing for Shelter
Scotland, home to just five million people, has never weighed on the minds of currency traders and market investors the way that Russia or China or the eurozone has — until now.
A poll this weekend showed Scottish voters for the first time favoring independence, and a risky unknown that had not been on the radar of most investors suddenly loomed large.
The British pound tumbled on Monday, and the stocks of financial institutions with large operations in Scotland fell sharply.
The selling, analysts said, was a protective reaction, as large institutions moved in a herd to hedge against what could be a new market-rattling event.
“There is just massive uncertainty,” said Mujtaba Rahman, the European director for the Eurasia Group, a political and economic consulting firm. “From what an independent Scotland would look like to the currency, the financial system and even Britain’s membership in the European Union.”
At the root of the unease is that a separation of Scotland would be a very messy affair, not least because no one seems to have truly prepared for it. Worst-case scenarios include Scotland reneging on its 143 billion pounds in debt, which would be a disaster for the rest of Britain as the main guarantor of those loans.
A Scottish secession would be more likely to weaken Britain’s pro-European Labour Party and possibly bolster a growing faction of voters in Britain who want the country to leave the European Union — a move that British business and financial leaders have long opposed.
Adding to the unease, Mr. Rahman points out, is that two of Britain’s largest banks, the Royal Bank of Scotland and Lloyds Bank, have significant exposure through several businesses.
Much of the worry revolves around how Scotland could survive as an independent country, dependent largely on the oil it gets from the North Sea. Independence proponents have said they want to keep the pound, but without a central bank looking after its interests, Scotland would again find itself hostage to British fiscal and monetary policy.
For about a year, polls have shown Scottish voters preferring to remain in the United Kingdom, in the face of a broad campaign supported by mainstream businesses in Scotland and British political leaders.
The view, broadly, was that while many Scots were happy to complain about life in the 307-year-old union, the financial and economic risks of going it alone would keep a majority from voting yes.
But the independence movement has been gaining in strength, helped by the charismatic head of the Scottish National Party, Alex Salmond, who was widely seen to have thrashed his opponent in a recent debate on the topic. At the same time, frustration toward Britain’s Conservative-led coalition government has grown in Scotland.
Over the weekend, a YouGov poll showed the pro-independence campaign in front for the first time, by a 51 to 49 percent margin. Scottish voters go the polls on Sept. 18 to decide whether to leave the union or stay in it.
On Monday, the pound, which had been rising on the back of Britain’s recovering economy, retreated 1.3 percent to $1.61, its largest daily reversal in more than a year. Since mid-July, the pound is down 6 percent against the dollar. Benchmark British bonds also lost value, as did stocks.
It was the currency’s sharp move, however, that most unnerved market participants. And taken together with last week’s steeper fall in the euro, this bout of currency volatility highlights how complacent investors have become in recent years. Years of very loose monetary policy and booming asset prices have created a sense of calm that can be punctured easily.
“When you go through these periods of low volatility you can get lulled into a false sense of safety,” said Jens Nordvig, a foreign currency strategist with Nomura in New York. The reaction in the currency markets can, as a result, be quite violent.
Mr. Nordvig pointed out that in adjusted terms, the euro’s 1.5 percent fall last Thursday — following a promise by the European Central Bank’s president, Mario Draghi, to take extra steps to stimulate Europe’s economy — was the largest in its history.
The pound’s drop on Monday was not as extreme but was “remarkable” all the same, Mr. Nordvig said, reflecting a somewhat frantic push by large asset managers, sovereign wealth funds and corporations to protect their exposure to pound-denominated assets.
Even with the new polls, most political analysts do not expect Scottish voters to vote to break away, although many acknowledge being a little less secure in their prognostications after this weekend’s polls. They argue that as doubts mount, the British government will continue to offer up policy measures to persuade Scotland to stay in the union, such as a bigger say in key spending and taxing issues that now are controlled from London.
It is thought that these last-minute sweeteners will have their effect as most Scots will prefer the predictability of an enhanced if still unpopular union with Britain to a financially uncertain future out on their own.
For precedent in this regard, some analysts have cited the 1995 referendum in Canada for independence for Quebec. Polls then showed the independence vote leading until the very end. As it turned out, though, some pro-independence voters shifted course at the last moment, with the result being a narrow 50 to 49 percent margin in favor of keeping Canada together.
Source: NYT
