If Scotland votes Yes to independence the knee-jerk response in the markets is easy to predict: sell sterling, sell UK equities, sell Scottish financials and short Spanish debt on Catalonia fears. UK gilts may offer a safe haven but this is not certain given questions about the allocation of debt in divorce, enhanced risk of rump UK exit from the EU and potential contingent liabilities associated with a messy break-up of the UK.
In particular there has been insufficient attention to the challenge that would be faced by the Bank of England maintaining unlimited liquidity provision to Scottish banks during the transition to independence, particularly if uncertainty about future currency arrangements were to result in cross-border capital flight. There is a non-trivial risk this could end in a credit crunch in Scotland.
The onset of divorce negotiations would lay bare that Scotland faces an impossible trinity: full independence, financial stability and deep economic integration with the UK. It can have any two of these but not all three.
Read it all Krishna Guha of the FT.
Good article.
I have noticed the remarkable number of large houses and estates up for sale in Scotland recently. Whichever way the vote goes it looks like a spendthrift high tax and rather business and wealth unfriendly future awaits Scots. It may explain the banking, business and landowning interests bailing out before things deteriorate any further and high tax and confiscation becomes the order of the day.