U.K. markets slide as poll shows first lead for Scottish independence

September 8, 2014, 12:23 PM UTC
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Sterling and U.K. stocks fell sharply Monday after a weekend poll suggested, for the first time, that Scotland will vote for independence in a referendum on Sept. 18.

The pound fell to a 10-month low against the dollar as investors hurriedly tried to make sense of a scenario that almost everyone, until recently, had refused to consider seriously. And in a sure sign of the negative mood sweeping London, the pound even fell to a new three-month low against the euro, despite the European Central Bank’s best efforts to weaken the single currency last week.

The FTSE100 stockmarket index also fell 1.1%, with Scottish-based banks, insurers and engineering groups being among the worst hit. Royal Bank of Scotland Plc and Standard Life Plc, the largest Scottish-based bank and insurance company respectively, have warned they might have to relocate their headquarters to England if Scotland votes to go it alone. Their stocks were down by 3.7% and 2.9% respectively by lunchtime Monday.

A poll by the research institute YouGov at the weekend had showed support for the pro-independence “Yes” campaign at 51% vs 49% for those in favor of staying in the U.K.. The figures exclude 6% of respondents who said they didn’t know who they will vote for. Only a month ago, the ‘No’ camp had enjoyed a 22-percentage point lead.

Although it’s the only poll so far to show a majority for independence, most other polls suggest that the ‘No’ camp’s lead has narrowed sharply over the last two months: undecided voters have come off the fence in favor of a ‘Yes’ campaign that has consistently struck a more positive, aspirational tone than their opponents, who have harped on the risks of separation.

Alex Salmon, the Scottish Nationalist leader of the devolved government in Edinburgh and head of the ‘Yes’ campaign, “has neutralized the fear factor,” according to YouGov president Peter Kellner. In addition, he says, Salmond has managed to convince voters that if they vote ‘No’, they’ll have to put up with an endless stream of policies dreamt up in Westminster that most Scottish people oppose.

The trouble for the ‘Yes’ camp is–the scares whipped up by their opponents are actually for real, economists warned Monday.

The biggest of those revolves around the currency. Without a binding agreement over monetary arrangements, Scotland will likely face higher borrowing costs due to its lack of a track record in international markets, and the fact that the currency won’t have the status of an international reserve currency, according to international credit ratings agencies. That will hurt its ability to deliver promised improvements in health and education spending.

The ‘Yes’ campaign says Scotland will continue to use sterling after independence, but few outside the country agree. All three of the main parties in Westminster refuse to share the pound, having seen in the Eurozone the problems caused when countries share a currency but not a government. And a poll in August suggested that English voters opposed sharing the pound with an independent Scotland by a margin of nearly 2:1.

George Osborne, the U.K.’s Chancellor of the Exchequer, again firmly ruled out sharing any sort of currency union with an independent Scotland at the weekend. At the same time, he dangled the prospect of more powers over taxing and spending for the devolved Scottish assembly in Edinburgh.

Even so, over 50% of Scots accept the ‘Yes’ camp’s claim that Westminster’s position is a bluff, according to YouGov.

Oh no it’s not, independent economists warned Monday.

“Be afraid, be very afraid,” Paul Krugman wrote in the New York Times. “You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.”

Krugman said it was “mind-boggling that Scotland would consider going down this path after all that has happened in the last few years.”