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Sterling fell to a 10-month low on Monday after the campaign for a Yes vote on Scottish independence took the lead in a poll that left the pro-union camp scrambling to head off a surge in support for a breakaway from Britain.
Chancellor George Osborne on Sunday promised within days “a plan of action to give more powers to Scotland”, including more control over taxes, welfare spending and job creation, if the country rejects independence on September 18. However, behind the scenes some senior Tories were preparing for possible defeat.
The pound had dropped 1.3 per cent by midday in London to $1.6118 against the dollar and 1.3 per cent to €1.2450 against the euro. The falls came after a Sunday Times/YouGov poll that put the campaign for independence narrowly ahead by 51 per cent to 49 per cent – the first time a survey has given the Yes side a lead this year.
UK government debt is underperforming peers, too, with the 10-year gilt yield up 2 basis points at 2.48 per cent. The Scottish National party has said it will refuse to take on any of the UK’s debt obligations if it cannot keep the pound.
London’s benchmark FTSE 100 share index was down 0.9 per cent, with financials with a large exposure to Scotland leading the declines. This was despite the fact a weaker sterling might be expected to lift the FTSE 100 because so many of the index’s constituents make a large proportion of their sales in dollars.
Lloyds Banking Group was down 3.2 per cent at 71.6p and Royal Bank of Scotland was off 3.15 per cent at 336p. Standard Life was 3 per cent lower at 403.70p and Aberdeen Asset Management fell 1 per cent to 441.9p.
Sandy Chen, analyst at Cenkos Securities, said that if the Yes campaign won the referendum, he expected a rush to redomicile bank accounts from Scotland to England, led by corporate deposits, as a currency separation was likely to use the registered address of a bank account as its reference point.
“This could quickly hollow out the Scottish balance sheets of the banks; deposits would go south, but loans would remain, creating a funding gap at the same time when Scottish wholesale funding rates would likely be rising – thus exacerbating the pain . . . All of the UK-listed banks, except for Standard Chartered, would be affected by this internal shift in balance sheets.”
Simon Derrick, chief markets strategist at BNY Mellon, said a Yes vote would leave the financial markets facing “a significant number of uncertainties”.
“Beyond the currency question itself . . . there remains the issue of UK national debt, ownership of North Sea oil and the impact on UK companies with significant cross-border operations. There is also the issue of the political uncertainty,” Mr Derrick said.
Investors are now also factoring in the likelihood that it would delay any move to raise interest rates by the Bank of England. The sterling overnight interbank average rates showed the market was not expecting the first rate rise until seven months’ time, compared with six months a week ago.
Valentin Marinov, currency strategist at Citi, said: “A Yes vote will reduce the chances of early rate rises. It would be a trigger of economic uncertainty, and may delay companies’ investment and hiring decisions. The BoE’s outlook for the real economy may have to be adjusted as a result.”
Lena Komileva, at the consultancy G+ Economics, added: “The implications of increased economic uncertainty, financial volatility and fiscal risk post-separation would most likely result in a delayed BoE rate hike and tighter bank regulation to manage systemic risk in a fragmented union.”
The pound has fallen about 6 per cent against the dollar since early July, chiefly due to increasing uncertainty over the timing of BoE rate rises, contrasting with a more hawkish Federal Reserve.
Analysts think the one-off shock of a vote for Scottish independence could drive sterling down further, as far as $1.50 to the dollar, but the implications for UK interest rates would lead to more persistent weakness.
Alistair Darling, the leader of the No campaign, rejected Nationalist accusations that the devolution of more powers was just a bribe. “The additional powers coming to the Scottish Parliament were announced by the party leaders north and south of the border some time ago,” he told the BBC on Monday.
“People have said yes, we want to know the timetable and the process, and that is something that the government is going to announce this week.”
Mr Darling said he was “very confident” of victory because “a majority of people in Scotland do want to ensure that there is a better and stronger future for themselves and the generations to come.”
John Swinney, the Scottish government finance secretary and prominent independence campaigner, told the BBC his side was far from complacent.
“Obviously the momentum and movement in the campaign has been in our favour but I think it’s a pretty fair assessment of the polls to show that the Yes campaign still remains behind in general, we certainly are in the poll of polls,” Mr Swinney said. “But the movement is in our favour and the campaign is exciting an enormous amount of interest and activity and participation on the ground across Scotland.”
Mr Osborne dismissed suggestions that a Yes vote might trigger resignations from the government, telling the BBC: “This is not about individuals.”
But several Tory MPs told the Financial Times they were called over the weekend by officers of the backbench 1922 committee – the so-called “men in grey suits” – to see if David Cameron would retain their confidence if he lost next week’s vote.
One MP said that if Mr Cameron lost the UK, some Tory MPs with grievances towards the prime minister would take the chance to make a move against the leadership. “The buck stops with him,” the MP said.
A number of Tory MPs are frustrated by Mr Cameron’s refusal to countenance a non-aggression electoral pact with Ukip. “The issues could all come together,” said another Tory MP. A vote of confidence in Mr Cameron would be triggered if 46 Tory MPs requested one.
Mr Osborne’s promise of a timetable for further devolution to Scotland, which is expected to include a cross-party convention to hammer out details of the transfer of powers, exposed a lack of co-ordination in the No campaign.
Alistair Carmichael, the Liberal Democrat Scottish secretary, said it was “just a new statement on something I’ve been saying for months”.
Reporting by George Parker, John Aglionby and Josephine Cumbo in London, Mure Dickie in Edinburgh, Jamie Chisholm in London and Alistair Gray in Glasgow