The Eve of Scotland's Decision

If you are physically situated near the English Scottish border and you've notice an unusual spike in the number of money trucks moving from across Scotland into say Cumbria, England, then that figures. Apparently, British banks have been discretely moving millions of banknotes north of the border to cope with any surge in demand by Scots to withdraw cash in the event of a “yes” vote in today’s independence referendum, it has emerged.

According to a source at The Independent, a British national morning newspaper, this move has been quietly taken place over the past week or so in order to make sure ATMs do not run out of cash on Friday in the event of a panic reaction to a “yes” vote. The financial authorities are anticipating a flurry of Scottish account holders moving their money to English banks in the event of an independence vote.

Bankers are stressing that there has been no signs of a bank run, massive withdrawals from deposit accounts or ATMs. Indeed, the banking community is insisting to deposit holders that there is absolutely no need for deposit holders to panic. The rationale being that the Bank of England has pledged to guarantee all accounts for at least 18 months in the event of a “yes” vote.

Nevertheless, this has not calmed bank deposit holders' concerns on how safe their cash is likely to be in the event that Scotland votes for independence. Indeed, should the Scots vote a “yes” for independence it raises a sticky question of who would be the guarantor of bank deposit accounts in Scotland, for example in an unfortunate situation where the bank is in need of a financial bailout. Its unlikely that the Bank of England would be willing to fulfill the role of guaranteeing Scottish bank accounts indefinitely should Scotland vote for independence.

The Bank of England as the lender of last resort was the main motive behind the RBS and then Lloyds last week moving their registration addresses south of the border. This move was apparently made by both banks to reassure their deposit holders of the continuing protection available to them irrespective of whether Scotland voted for Independence.

A further part of the banks contingency plans has been to move physical cash to secure locations in Scotland in readiness that their branches can keep up with the potential increase in physical demand.

Scottish branches have been instructed to reassure customers that there was no reason to panic, according to an anonymous source at a major bank. “We have seen a big rise in customers coming in and asking us what would happen, but there is no sign of any significant flow of deposits from north to south.”

UK banknotes are created at a Bank of England printer in Debden, Essex. The notes are then held in secure depots managed by a group of major banks situated around the country. Secure vans are deployed to physically move the physical notes and coins around the country. The little-known arrangement is called “Notes Circulation Scheme,” which keeps banks informed if more notes need to be printed.

A source at one bank said: “This forms part of our contingency planning. We are, of course, monitoring the situation very closely from hour to hour.”

The Bank of England latest figures indicates that the amount of notes in circulation has been creeping up steadily over the last year. This month there are 62.3 billion notes in the country, compared with 59.8 billion a year ago.

Considering what is at stake the markets appear to be reacting remarkably calm. Sterling remains comfortably above its support of 1.60 USD at 163. The market obviously doesn't believe that the Scots will vote to go it alone. Market consensus is that 82 percent believe that the “no” vote will win with Scotland remaining in the union. However, if we compare the latest UKGov polls on Scottish Independence 52 percent are likely to vote for “no” to Scottish Independence and 48 percent “yes,” with a margin of error of three percent. Therefore, according to the polls it is too close to call. Bearing in mind that the market has factored in a win for the “no” vote to Scottish independence, if the “yes” vote were to win we might see considerable downside movements for sterling. But this is an unlikely event according to the markets.

The big guns have all jumped on the political ban wagon campaigning for Scotland to remain in the United Kingdom. British Prime Minister David Cameron made an impassioned plea to the people of Scotland to reject independence. UK was not just “any old country” and that millions of people would be “utterly heartbroken” if it was broken up, said Cameron.

Meanwhile, a series of major figures in US politics and economics warned Scots against a Yes vote. Alan Greenspan, former US Federal Reserve chairman, said the economic consequences would be “surprisingly negative for Scotland, more so than the Nationalist party is in any way communicating”.

He said their forecasts were “so implausible they really should be dismissed out of hand.” Greenspam then added that “there was no way the Bank of England would agree to remain the lender of last resort to an independent Scotland.”

Even the German , Deutsche Bank, is throwing a bucket of cold water on the idea of Scottish independence. “Yes vote would herald a 1930s-style depression,” according to an analyst at the bank.

But that was considered to be over done, according to rival bank Commerzbank, “some of the worst-case scenarios painted in recent days appear exaggerated”, providing evidence that Scottish shares have actually outperformed those of the UK as a whole this year, rather than registered any major collapse.

So on the eve of Scotlands decision we wait. It's always difficult to speculate which way sterling will go with certainty, however, a “yes” vote would shock the markets and could send sterling tumbling. Would the Bank of England then be forced to raise rates sooner rather than latter, to support the pound, if this scenario occurred?

On the other hand if the “no” vote wins, a pound rally might then ensue and that would make raising base rates difficult. Already UK exporters are moaning about the strong pound.

Scotland's Referendum

Scotland's referendum to break away from the union jack is a big currency moving event, already the pound has tumbled to a ten month low on news that 51percent of Scots support the yes vote for an independent Scotland, according to a recent YouGov poll.

Whether the Union Jack would look the same, or Londoners would need a visa to visit Edinburgh Festival to listen to some fine music, should the Scottish yes vote win, might well be an interesting question to ponder over, but that would deflect us from the big issue. 

Perhaps it’s the politics behind Scotland's independence and its far reaching consequences on finance and politics, not only within the UK but beyond its borders, that merits us taking a closer look.

While a financial meltdown and economic collapse has been averted or delayed, following the financial crisis in 2008 and the longest recession in history that ensued, the populace frankly don't feel the recovery. Real incomes have not recovered for millions of workers struggling to meet daily expenses and the jobs that have been created in the service sector are lower paid and less secure. To some extent this economic recovery sustained by loose monetary policy has been built on a sandcastle of debt and cheap money. UK Industrial Product and construction remains stubbornly below pre 2008 financial crisis level, youth unemployment at 20.6 percent in Scotland, which is 0.5 percent above UK national average, according to May 2014 figures. Meanwhile, we have stock markets at record high, unaffordable property prices and low bond yields. So the economic policy pursued may have aided and abetted an unbalanced economic recovery, where there are relatively just a few gainers and many losers. When the populace voice their concerns the government's and central bank's solution is the same; more austerity and loose monetary policy. 

Then it is no surprise that the electorate feels unrepresented, disconnected and alienated from the political establishment who fail to address the electorate's basic needs for better job security and wages, affordable housing, functioning essential public services and more employment for the youth. If the Scottish people believed that their political needs were being addressed by the leading coalition Conservative party in Whitehall in London, or even the main opposition Labour party, they would most likely be less support for the “yes” vote in the forthcoming Scottish referendum on independence.

So this political alienation has to some extent created a type of political vacuum, a situation where the electorate no longer feels represented by the mainstream political parties, and it can manifest itself in several forms. On one end of the spectrum is voter apathy typified by low voter turnout while on the other more dangerous extreme end of the spectrum is radicalisation. With Muslim extremists on the rise in Britain that might lead us to the politically explosive Rivers of Blood by Enoch Powell's and it’s best not to go there. 

However, with respect to Scotland's rise for the “yes” to independence, could that then be a kind of anti-elite and anti-establishment vote by the disenfranchised Scottish electorate. Perhaps that's a moot point but what is more clear is that this rising political uncertainty is not beneficial for business. Large scale capital investment tends to be delayed or put off by private enterprises during a climate of political ambiguity. Investment in Scottish real estate is being put on hold until the outcome on the September 18 Scottish Independence Referendum. Some real estate agents believe that property prices have already discounted the political uncertainty and could rebound strongly if the “no” vote wins. Alternatively, if the “yes” wins some analysts are predicting property prices to fall a further 15 percent one year after the referendum.

So the “wait and see,” or expand elsewhere approach to business investment as a result of the political uncertainties might act as headwinds on the UK’s economic growth. 

The political and financial fallout of an independent Scotland could also have ramifications in Europe too. It might give further impetus to the Spanish Catalans to push for independence from Spain. Catalonia is also facing a referendum and no doubt how Scotland votes will be closely watched by the Catalans. In many ways the two regions share similarities, Scotland is wealthy due to its natural resources such as oil and Catalonia is the most industrial region of Spain. Like Scotland, Catalonia believes its paying too much into central government and gets less in return, thereby bank rolling the poorer autonomous regions of Spain. So it too sees central government as a drain and believes it would be financially better off independent. 

It seems paradoxical that on the one hand the architects of the European super state, the EU, are peddling for more integration and austerity amongst its members as a solution to Europe's woes. Meanwhile, the autonomous regions within the EU states are pushing for separation from their central government. Believe it or not there's even a push for independence in the country where the EU parliament is situated, Belgium, where independence movements are growing stronger.

No doubt the Belgians too will be watching the outcome of the Scottish Independence referendum on September 18. With all this in mind an independent Scotland might have more than just an impact on sterling. Could it herald in a new era of anti-globalisation and the super state? If so, then its impact on the Euro and beyond might be wider than anticipated.