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Goldmans warns on 'severe' implications from Scotland 'Yes' surprise

Goldmans warns on 'severe' implications from Scotland 'Yes' surprise

Goldman Sachs has warned a 'Yes' vote could have severe consequences.

The referendum takes place on 18 September and recent opinion polls indicate the gap between the 'Yes' and 'No' camps has narrowed.

Following the second televised debate between Alex Salmond and Alistair Darling, the respective heads of the Yes and No campaigns, on 25 August gap between the two shrunk to 8 percentage points in favour of a Yes vote.

While Goldmans acknowledges the gap has narrowed, analyst Kevin Daly still believes the No vote will come through for two reasons.

'[First] although the ‘No’ camp’s lead in the polls has narrowed and is likely to narrow further, even a 4/5 percentage point gap remains substantial in the context of a campaign that has only two weeks to run,' Daly said.

'[And] second, in the UK’s limited experience with televised debates (and in jurisdictions in which such debates are more commonplace), the post-debate bounce experienced by the ‘winning’ side often fades in the subsequent days and weeks.'

A Yes vote would have severe implications

While in the long run Daly sees little reason why an independent Scotland could not prosper, he warned the short-term surprises could be severe.

'If Scotland votes 'yes', a prolonged period of negotiation would follow between Scotland and (the remainder of) the UK over the terms of the separation (prior to the separation being completed on March 24, 2016),' Daly said.  

'The issues that would require negotiation include whether and under what terms the newly-independent Scotland would be able to retain sterling as its currency, and how existing UK government debt would be split between Scotland and the remainder of the UK.

'Separately, Scotland would have to negotiate with the European Union as to whether it would remain a member of the EU. Because the outcome of these negotiations is unclear, one general consequence of a surprise 'Yes' vote is that it would result in a prolonged period of uncertainty. This, in itself, is likely to have adverse economic consequences for Scotland and the UK.'

Daly sees the most important specific risk as currency uncertainty, with doubts over whether Scotland can carry on using sterling.

The UK government has said an independent Scotland would not be able to use sterling, while pro-independence campaigners expect the UK to quickly change its stance in the event of a Yes vote.

Daly believes the threat to disband the sterling monetary union with Scotland is a credible one.

One of the main lessons learned from the euro area crisis is that a reasonably high degree of fiscal and/or financial integration is necessary, as a means of effective risk sharing, for a monetary union to work.

'Without political and fiscal integration, it is difficult to see the rest of the UK agreeing to provide a monetary and financial backstop to Scotland.'

Daly added: 'Moreover, even if the sterling monetary union does not break up in the event of a ‘Yes’ vote, the threat of a break-up would provide investors with a strong incentive to sell Scottish-based assets, and households with a strong incentive to withdraw deposits from Scottish-based banks. '

He also highlights that an independent Scotland would face a significant budget adjustment if it is to put its fiscal position on to a more sustainable path.

'Under the terms of the existing ‘Barnett formula’ – a mechanism used by the UK Treasury to adjust the amounts of public expenditure allocated to Scotland, Wales and Northern Ireland – public spending per head of population in Scotland is materially higher than in the rest of the UK, despite income per capita in Scotland being broadly in line with the rest of the UK,' Daly said.

'Scotland currently receives significant fiscal transfers from the rest of the UK and, given that it has an older demographic profile than the rest of the UK, the size of the net transfers from the rest of the UK to Scotland is likely to increase over time.'


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