Spotlight on Sterling

by | Sep 11, 2014

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Neil Davies, Head of Trading at PlutusFX, sees a continuing pressure on sterling. 

For now, the problem belongs to the UK. Sterling’s well publicised decline since a Scottish Independent ‘yes’ vote became a possibility is unlikely to reverse completely until after September 18th and only then if the Union stays intact. There are predictions of a 7-10% sterling fall if the Union falls.

As we move towards the day, the currency issue will be the overriding one and will be the deciding factor that drives enough voters to say no and it’s quite clear why.

In 2013 a ScotCen Social Research poll suggested that if voters were £500 better off by independence, then 52% would support it. However, if voters were £500 a year worse off, then 72% would oppose it.

If the question were posed with something much more significant than £500, perhaps the value of your life savings, the stability of the bank they are lodged with, the currency they are held in and the credibility of who the ‘lender of last resort’ is, then I would estimate that the poll would be a little further towards the ‘no’ camp.

Alex Salmon has stubbornly said, from the outset, that the Scots will keep the pound, but has failed to produce any credible plan.

So what are the alternatives available:

1 – Keep sterling. Westminster says this is not an option, but cannot stop the GBP being used as a proxy currency in a Sterlingized economy (as for example Panama does with USD). This would however leave Scotland with no say on interest rates, no ability to print its own money, or provide liquidity to its banks in times of crises. Given that financial services is Scotland’s second biggest industry, imagine the impact of a major flight of cash to what would be seen as far more stable and secure English banks.

The reality is though, in the event of a Yes vote, this will be the only interim option.

2 – Join the Euro. Salmond isn’t keen on this, although if they join the EU, it will be required to commit at a future date. This option can only be long term. Countries joining usually peg to the Euro for a period of time before conversion, but Scotland have nothing to peg, or convert. Would the Scots be happy for a compulsory change of their life savings? Or, send their cash south?

3 – The Scottish Pound (or Dollar/Lira/Krona). They will be able to print the notes, but would start life with a very high debt to GDP ratio that would severely limit policy options. However, Salmond in these circumstances has said he would not take on the share of the UK debt. As a debt defaulter from day one, the Scottish economy could only then borrow at ‘Wonga’ interest rates.

With the bookies, a ‘No’ vote is firm favourite. Independence may be glamorous and romantic, but it’s cold hard cash that matters. Should the pro impendence vote fail, it will be this one issue and Salmond’s lack of a plan that he will have to answer for. If the status quo remains, then sterling will, in theory at least, firm quite sharply.

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