UK: Have you heard about the new Scottish financial City?

Scottish Independence Referendum

Two banks, the large columns of the Scottish banking Olimpo lie today audited by the British Treasury with a cost close to 70,000 million pounds to save them from collapse under the 2008 credit crisis. Neither the Royal Bank of Scotland (RBS ) has been able to give back a penny of 45,000 million it received from the UK government, and Lloyds Bank has significantly reduced public participation, even 40% – without forgetting about 275,000 million in guarantees offered by the state to the two banks.

The bill of grants and capital injections signed by London seems to contradict George Mathewson, former CEO of RBS, who has denounced the “anglocentric” policies of the Westminster Parliament by the “lack of development and expansion” of the Scottish financial City.

The truth is that RBS paid recently 1,500 million pounds to the central government so that it renounces its right to collect dividends before any other private investor. But the overall picture of the financial services sector in Scotland is unchanged: it is an industry of enormous dimensions, with 89% of investor-customers located in the rest of the UK, 33% of savings accounts in foreign banks, 70% of life insurance and external pension suppliers, and assets of 1.9 billion pounds, or 12.54 times the gross domestic product of the country (in Iceland, the ratio was 8.8 times when it defeated in 2007).

Only during the last two years, the City of Scotland has lost 12,000 jobs (data from 2013). Its production continues weak, 13% below the figures achieved in the second quarter of 2008 or prior to the bursting of the financial bubble.

“Against what is usually argued, I think the Scottish independence would not only cause financial chaos, and the loss of thousands more jobs in the industry, but it could become a turning point where the sector of the country would become a genuine centre of activity, attracting the global interest. That is, if a reduction in the tax burden on corporations is approved and a favorable legislation for financial markets is implemented such as London or Dublin did,” says Javier Flores, head of department of Studies and Analysis in ASINVER, the European association of professional investors.

Even in the financial City of London there are experts whose opinion coincides with Flores.

Not so fast

Chris Beauchamp, market analyst for IG in London, adds his voice to those who contemplate the possibility that Scotland build its own financial industry with new – and more fluent – relations with other states of the European Union, once it released itself from the legalistic British euroscepticism.

“It’s certainly feasible, with the assumption that the country already has financial services. Moreover, large banks with headquarters in Scotland constitute an ideal spinal column for the nascent State to face this kind of challenge,” Beauchamp explains.

But a report released in May in the British Parliament on the consequences of a possible independentist victory on the  Scottish financial sector. However, it already warned that the loss of the British umbrella entails bigger costs for loans, for example. The writers of the document indicated that Santander UK, despite its exclusive belonging to the UK market and its separation from the Spanish parent company, it suffers the most expensive yields of the British banking system for not being ‘British’ enough for the investors.

Conversely, the performance of 10-year UK government bonds compared with those of Germany, and the pound’s performance against the American dollar in the first week of September have shown that all parts involved can lose.

When the advantage of unionism at the referendum was shortened to less than six points, protection against non-payment of British debts shot up – stocks experts believe the purchase of credit default swap (a financial product used to offset losses if a state goes bankrupt) could cost 200,000 euros more in British bonds than German bonds. At the same time, the value of the pound in dollars fell suddenly 0.6%.

“There could only be real problems if negotiations [in case the option of independence wins] become long and complicated. In this case it might even happen that some firms and banks would move to London,” says Beauchamp. As Flores, he believes that short-term volatility is not relevant.

For the official unionists, the future for both parts should they split up is awful. The structures of UK state will take off public institutions such as the UK Green Investment Bank for investments in the renewable energy sector, the Scottish financial City will lose power, and the independent government will be pushed to open doors to the shady market practices -bank secrecy, minimum tax for vulture and hedge funds- to survive. We’ll know the answer on the 18th. Voting will have been the easiest.

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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