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Citi: nothing ‘plausible’ about Scottish independence

by Dylan Lobo on Mar 10, 2014 at 14:21

'Our best guess, weighing up the uncertainties, is that an independent Scotland would be rated in the high ‘single A’ region with risks on either side. 

‘We judge that the long-term “fair value” yield spread over UK gilts would be around 125 basis points. The initial yield spread might need to be larger to aid the establishment of a new, unproven market which would initially be very illiquid.’ 

Drop in oil revenues and bank risk

Citi also highlights how the recent drop in oil revenues means Scotland’s fiscal deficit is now significantly above UK levels. ‘We estimate that Scotland’s fiscal deficit has risen from about 5% of GDP in 2011/12, to about 7.9% of GDP in 2012/13 and about 8.3% of GDP in 13/14.'

Scotland’s huge banking system, which contains asset of more than 1,000% of Scotland’s GDP, is another major cause for concern. Citi points out that during the credit crunc,h the recapitalisation costs of RBS totalled 30% of Scottish GDP and another crisis of similar proportions would leave the country extremely vulnerable.

‘If Scotland becomes independent, its fiscal position would become highly vulnerable to banking risks, which would oblige the Scottish government to set additional bank capital surcharges or to ensure the that Scottish banks markedly shrink their balance sheets.'

The possible relocation of the likes of Standard Life and Alliance Trust could also have significant implications said Citi. ‘Such a move might cut Scotland’s banking-related fiscal risks but would also probably hit growth prospects.’

Lack of monetary policy

The UK’s refusal to establish a monetary union with an independent Scotland also worries Citi, which points out the possible alternatives have sizeable costs and risks.

‘We are genuinely unsure what currency and monetary policy would be adopted by an independent Scotland,’ Citi said.

‘In our view, it is astonishing that the Scottish government, in seeking independence, has reached this stage: seeking a currency union without agreement with the rest of the UK and without a clear alternative plan.

‘The painful euro area strains make it clear that the set-up for the currency and monetary policy is crucial: It cannot be ignored or assumed to “be alright on the night”.  

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