Potential for ‘deep recession’ if Scotland goes solo

The Swiss bank’s economists reckon that Scotland would slump into a “deep recession” if it secedes from the UK, and deposit flight from its banking sector is both “highly likely and highly problematic”, given the size of the embryonic country’s financial sector.

“Should the Bank of England move to guarantee Scottish deposits, we expect it to extract a high fiscal and regulatory price (probably insisting on a primary budget surplus),” the group said.

“The re-domiciling of the financial sector and UK public service jobs, as well as a legal dispute over North Sea oil, would further accelerate any downturn.

“In our opinion, as North Sea oil production slows, we estimate that the non-oil economy would need a 10 per cent to 20 per cent devaluation to restore competitiveness. This would require a 5 per cent to 10 per cent fall in wages, driven by a steep rise in unemployment.”

On Scotland’s currency options, Credit Suisse estimates a roughly 50 per cent chance of an arrangement that keeps the value of the Scottish pound versus the UK one, either through a formal currency union with the UK or a Hong Kong-style currency board.

That still leaves a worrying 50 per chance of a Scottish currency falling in value, either through a peg to the pound that would ultimately not hold (40 per cent chance), or a freely-floating currency from the offset (10 per cent chance).

Credit Suisse also highlights the risk of a constitutional crisis as a result of a vote for independence.

“We believe a yes vote would result in a constitutional crisis until Scottish MPs are excluded from Westminster,” it said.

“When they are, the Conservatives would have an ongoing electoral advantage in the UK.”

The UK would not escape unscathed either. Credit Suisse estimates that a vote for independence on September 18 could send sterling down to about 1.5-1.55 against the dollar, approximately another 7.4 per cent drop from today’s already-depressed level.