And now, the Scotland Scare
Investors have a new chunk of rock and nationality to worry about this week. Not Ukraine, not Syria, not Iraq, not Liberia ...
Look north, turn left, and zero in on the land that brought us bagpipes, tartans, Macbeth, single-malt Scotch, kilts and of course, more importantly, and how could I even put it last, golf.
You might have heard that those renegades up in bonny Edinburgh and Glasgow and have just about had it with those rotters that run the United Kingdom down in London, and they want out. As the fair laddie Kris Kristofferson said, "freedom's just another word for nothing left to lose."
While we are always on the side of freedom and self-determination, there is a lot of concern that the Scots have not thought this through very well. The margin of potential victory for the pro-secession side is very small, but even the possibility that this could happen is freaking investors out.
Among the many reasons is that there are a lot of big global banks up there, and if they were to lose the aegis of the Bank of England they could be in a lot of trouble. Here are direct excerpts from analysts at the think tank Stratfor on the dangers a secession presents:'
"The political union between Scotland and England might be abolished after 300 years. The implications of this are enormous and generally ignored.
"Obviously, this raises a host of question about how such a divorce might take place, whether the expected time frame -- divorce by 2016 -- will be adhered to, and how state property might be divided. It also raises the question of Scottish foreign policy. Will Scotland remain in NATO? Will it have membership in the European Union? Will it continue to use the pound sterling, and if not, how will it roll out its own currency?
"These are important questions, but far more important issues will follow. One of the principles of the postwar world was the inviolability of Europe's borders. Border disputes were the origin of centuries of war, and so Europe's borders were frozen after World War II to avoid discussion. This may have left some people of one nationality on the wrong side of a border, but this was accepted since the risk of opening the door to border redefinition was considered far greater than any discomforts stemming from the borders that were locked in place.
"This principle has been weakened since the end of the Cold War. Still, though the disintegration of the Soviet Union created fully independent states, these were recognized republics within the context of the Soviet Union. One could argue that this did not in fact represent border change. Later, the "Velvet Divorce" of Czechoslovakia into Czech and Slovak successor countries represented another shift, but in a country that had only existed since the end of World War I. The separation of Kosovo from Serbia was a more radical shift but was justified by claims of Serbian oppression. Though each shift weakened the principle of inviolable borders, each came with an asterisk -- that is, each had an aspect that stopped it from being the definitive case.
"Scotland separating from England, by contrast, can't be minimized. If that centuries-old union can be revised, then anything can be revised. Scottish separatists' reason for splitting is that they are a separate nation, that each nation has the right to its own state and the right to determine its own destiny, and that they no longer choose to be in union. But if they have the right to determine this, why shouldn't others in Europe enjoy the same right?
"For example, modern Spain is an amalgam of regions. One, the Catalan region -- which contains Barcelona -- has a strong separatist movement. If Scotland can leave the United Kingdom, then why shouldn't Catalonia be allowed to leave Spain? Farther east, the Treaty of Trianon gave Romania and then-Czechoslovakia large portions of Hungary along with the Hungarians living there. Why shouldn't Hungarians living in those territories have the right to rejoin Hungary? Meanwhile, if French-speaking Belgians and Dutch-speaking Belgians wish to part ways and return their two regions to their respective countries of origin, why should they not be allowed to? And why shouldn't the eastern part of Ukraine be allowed to secede and join Russia?
"Raising the stakes, this is an issue that goes far beyond Europe. There are seemingly innumerable separatist movements in India, China, Africa and so forth. If Scotland has the right to leave the nation-state it is part of and form a new one based on ethnic identity, why can't anyone follow suit? And if anyone can do it, but they are blocked by the state they wish to leave, is resorting to violence in pursuit of independence legitimate?
"The Scottish issue -- the claim that the Scots are a separate nation and that all nations have a right to self-determination -- simply cannot be asterisked. Having this happen in the heart of Western Europe would set a clear precedent that would expand geographically and conceptually. It would legitimize similar movements globally and force a reconsideration of what a nation is. Ultimately, a nation would be whatever the majority says it is.
"It is doubtful that the Scottish precedent could be contained in Europe. And it is hard to imagine how this precedent might not lead to conflict somewhere, not in the British Isles but somewhere where the existing state would be less inclined to grant the right of self-determination to a separatist movement.
"Of course, the separatists in Scotland may well lose, sentiment might change in the post-election negotiations, and so on. But if England and Scotland divorce, the right to separate will become an integral part of international custom -- and it will arouse other movements."
And now here, courtesy of London Telegraph columnist Ambrose Evans-Pritchard, is the dour view of Credit Suisse. The investment bank analysts expect recession, deposit flight; a 20% currency devaluation and a 10% cut in wages. An excerpt, via Evans-Pritchard, from the CS report:
"In our opinion Scotland would fall into a deep recession. We believe deposit flight is both highly likely and highly problematic (with banks assets of 12x GDP) and should the Bank of England move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus).
"The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn. In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10% to 20% devaluation to restore competitiveness. This would require a 5% to 10% fall in wages, driven by a steep rise in unemployment.
"Scotland can have a huge banking industry, or it can have independence linked to sterling, but it cannot do both unless the Bank of England props up its lenders as a lender of last resort. Perhaps the Bank will do that as a courtesy gesture, but why should it? ...
"Significant deposit flight would require Scottish banks to offer much higher deposit rates, which would in turn increase borrowing costs for Scottish entities and individuals. This, in our view, would increase the risk of a severe economic downturn in Scotland post-independence.
"With North Sea oil output in decline(with the Office for Budget Responsibility calculating that output has declined by an average of 7.8% per year since 1999 and recent estimates by Sir Ian Wood putting North Sea oil reserves at 15-16.5 billion barrels versus estimates by the Scottish government of 24 billion barrels), it is clear that the non-oil manufacturing base in Scotland would need to be clearly competitive in order to attract in capital."
Evans-Pritchard himself offers this final comment:
"I happen to think that Scotland could prosper eventually as an independent ''Nordic'' economy, just like Denmark. But there are a great number of analysts from across the world who fear that it will be an almighty fiasco for the next decade unless Britain props it up. In my view, Britain will be forced to prop it up. Excuse me for feeling a slight irritation about this, as a Welshman"
Source: Markman Capital Insight.
