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Scotland Says "No" - Pound Remains Vulnerable To Currency Crisis

The result of the Scottish independence referendum was announced early this morning, with 55.3% of voters wanting to stay in the United Kingdom (UK) and 44.7% wanting Scotland to become an independent nation.

Voter turnout was exceptionally high at nearly 85% (about 3.6 million people), which was not surprising given the importance of the referendum.

To some extent a cloud of economic and currency uncertainty that was hanging over Scotland and the rest of the UK has now been lifted. Share prices of Scottish related companies such as Royal Bank of Scotland (RBS) have rebounded and sterling was higher against the euro, Swiss franc, silver and gold (see table).

Sterling was flat  against the dollar possibly due to longer term concerns about the political and economic implications of the referendum.

The pledges and promises to Scottish citizens by the ‘Better Together’ alliance will now have to be honoured. This includes devolution and decentralisation promises by the three main parties of the ‘No’ campaign, the Conservatives, Labour and the Liberal Democrats.

One of the most important pledges was a promise that Members of Parliament (MPs) representing British citizens in Scotland will be allowed to exclusively vote on issues which only impact those citizens. As this agreement needs to be equitable for the other nations of the UK, it will also be rolled out to MPs representing Wales and Northern Ireland.

Many other UK fiscal policies that affect Scottish voters will also now become priorities amongst the Westminster political class and their civil service.

The outcome of the vote however has now provided the current UK government and HM Treasury with what it sees as a mandate to continue to manage the UK economy and the British pound in a steady as she goes fashion. This will probably mean that the recent volatility experienced by the pound sterling will die down for now.


However, on a broader scale, the size of the ‘Yes’ vote, at 45%, signals that there is still deep unease in Scotland about being part of a larger United Kingdom and this unease is not about to go away.

It may well spread to Wales and Northern Ireland. The next UK Government will probably be a Labour government as the electorate protests at the way the referendum was handled by the current Conservative/Liberal Democrats coalition.

Therefore, the perceived ‘safe haven’ status of the UK economy and the financial powerhouse of London may start to be perceived as not such a safe haven.

Gold in Sterling - 5 Years (Thomson Reuters)

Given the remaining uncertainties, it will be critical to closely watch how the UK’s stock and bond markets perform in the coming months, how the pound sterling performs, and how international financial companies act as regards their London headquarters.

With financial might continually shifting eastwards to Singapore, Hong Kong and Shanghai, it will be interesting to see whether the City of London can now recover from its recent bout of Scottish induced panic.

HSBC analysts warned "the shine had already begun to come off" sterling. "Any disappointment on growth, or renewed focus on the large current account deficit, could still weigh on the currency," they said.

Sterling may also come under pressure if central banks and large institutions decide to reduce allocations to sterling and diversify into dollars, euros, Swiss francs and indeed the up and coming global currency the Chinese yuan.

The UK current account deficit reached a very high 5.7% of GDP in the last three months of 2013, which was its highest level since proper records started to be compiled in the 1950s.

Given the scale of indebtedness in the UK and still very high current account deficit, the pound remains vulnerable to a currency crisis. George Soros and others may still be sizing up another opportunity to break the Bank of England. Another run on the pound has been postponed ... for now ...