Scottish Independence: Good or Bad for Financial Markets?

On the eighteenth of September, Scotland votes on the issue of declaring independence

from the rest of the United Kingdom.

The issue has consumed reports recently; but the debate has gone on much longer, with Alex Salmond, leader of the Scottish Nationalist Party serving as a representative of the separatists and Alistair Darling serving as the voice and leader of the pro-U.K. campaign.

In recent weeks, particular attention has been paid to the issue, due to the repercussions an independent Scotland

could have on various economies across the world.

According to an article recently completed by the International

Business Times, already the outflow of funding to both Scotland and the

United Kingdom has been astronomical; twelve billion pounds, or twenty billion dollars of capital have been withdrawn

from the country already this year, according to statistics from the Societe

Generale SA.

The largest concern, according to the article, is the question of currency.

In the case of a vote towards independence, Scotland would theoretically have three

options.

The nation could retain the British pound.

However, in the case of following this path, Darling declares that Scotland would be at the mercy of the Bank of England’s determined interest rates for the use of their currency; without an environment of political peace, this rate could become unreasonable quite

quickly.

Alternatively, Scotland could adapt the euro or, as a final result, they could create their

own means of currency.

Whatever option the potentially independent Scotland would choose, it would not only be costly to the upstarting country, but potentially to various other economies around

the world.

For evidence of the effect this vote would have on the world, one needs only look at the

recent struggling of the pound.

In the last week, the British pound fell 1.3 percent against the dollar, to $1.611.

The pound also fell in value in regards to the euro as well, to 1.2488 euros; this figure is a

ten-month low.

On top of this, Scotland holds a portion of the United Kingdom’s sovereign debt; in the case of independence, the

country is expected to take its portion of the debt with it.

However, if they default on the debt, the responsibility falls to the remaining sectors of the United Kingdom to pay Scotland’s part of the bill.

This could increase the level of uncertainty of credit quality of the United Kingdom bonds

market.

Currently, bonds issued by the U.K. are considered a low-risk investment; however, if Scotland becomes independent and doesn’t pay its portion of the debt, the government would be further in debt, making bonds a far riskier investment.

Scotland, in turn, has no bonds—a costless threat that only adds to the list of reasons

against voting yes for Scotland independence.