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Citi: nothing ‘plausible’ about Scottish independence

Citi: nothing ‘plausible’ about Scottish independence

The debate on Scottish independence has really got our readers going.

The comments have been flying in, with Friday’s revelation that Alliance Trust was building a London base sparking fresh reaction.

‘I don’t have a problem if Scotland want independence, that is their right,’ said one reader. ‘It WILL happen sometime in the future, and as fair as I’m concerned the sooner the better.’

‘Most Scots don’t have a problem with the English as all…[They have] a problem with Westminster,’ another said.

Ahead of September's referendum, the pro-independence brigade currently sits in the minority at 35% with 53% against.

Citi has now weighed into the debate. The investment bank said it would be a big mistake if Scotland votes for independence, warning it would lose its AAA-rating.

‘There is nothing inherently plausible about a country with Scotland’s population and economy being independent,' Citi said in a detailed note on the country.

Bond uncertainty

For Citi there still remain too many uncertainties on the pricing of Scottish government bonds issued in the event of independence.

It is certain Scottish debt would trade at a higher yield than gilts in reflection of their relative liquidity and credit risk.  

‘It is unlikely, in our view, that Scotland would be given the top AAA-rating, but highly likely that it would be investment grade,’ Citi said.

'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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