The end of the UK’s haven sta­tus

Financial Mirror (Cyprus) - - FRONT PAGE -

The out­come of Thurs­day’s Scot­tish ref­er­en­dum is of­fi­cially “too close to call”, since the dif­fer­ence be­tween ‘Yes’ and ‘No’ has been inside the mar­gin of er­ror of almost all the polls pub­lished since the sud­den swing to­wards in­de­pen­dence last week­end.

But mar­kets are priced for near cer­tainty of the sta­tus quo win­ning, with ster­ling stronger than a month ago against the euro, yen, Swiss franc and ev­ery other ma­jor cur­rency save the dol­lar-and up 3% even against the dol­lar com­pared with a year ago.

In the very short-term this mar­ket po­si­tion­ing prob­a­bly makes sense.

De­spite the close­ness of all the lat­est polls, only one of which shows the No vote ahead by more than the stan­dard plus-mi­nus 3% mar­gin, the odds strongly favour the sta­tus quo be­cause the re­sults of so many sep­a­rate polls are so close.

Now for the bad news for in­vestors in ster­ling and other as­sets whose value is tied to the UK’s ‘haven’ sta­tus. Even if Thurs­day’s vote averts a breakup of the United King­dom, the re­lief rally is likely to be very brief and very small. Within hours of the ref­er­en­dum re­sult be­ing de­clared on Fri­day morn­ing, mar­ket in­ter­est will shift from the fate of Scot­land to the fate of Bri­tain as a whole-and in­vestors may be quite shocked by loom­ing prob­lems as they re-fo­cus their at­ten­tion on Bri­tish pol­i­tics in the eight months re­main­ing un­til the gen­eral elec­tion in May 2015.

LEAD­ER­SHIP UN­DER­MINED

Firstly, David Cameron’s lead­er­ship po­si­tion has prob­a­bly been ir­repara­bly un­der­mined. Even if Scot­land votes ‘No’ on Thurs­day, Cameron has suf­fered sub­stan­tial and prob­a­bly ir­re­versible po­lit­i­cal dam­age be­cause of the near-death ex­pe­ri­ence that Bri­tish politi­cians, me­dia com­men­ta­tors and pub­lic opin­ion suf­fered last week. Un­less the polls turn out to be com­pletely wrong and union­ists win by an over­whelm­ing mar­gin, vot­ers and in­creas­ingly febrile Con­ser­va­tive MPs will blame Cameron for what, with hind­sight, were mis­judge­ments in the way the ref­er­en­dum was run: the date of the ref­er­en­dum, which gave na­tion­al­ists the best pos­si­ble op­por­tu­nity to or­gan­ise; the phras­ing of the ques­tion, which need­lessly forced the union­ists into a neg­a­tive cam­paign; the bizarre decision to lower the vot­ing age to 16; the ab­sence of a su­per­ma­jor­ity of 60%; and, Cameron’s in­sis­tence that vot­ers should be con­fronted with a bi­nary decision be­tween to­tal in­de­pen­dence and pre­serv­ing the sta­tus quo in­stead of be­ing of­fered a mid­dle-way al­ter­na­tive of “max­i­mal de­vo­lu­tion”, which the na­tion­al­ists pro­posed as a com­pro­mise three years ago.

Se­condly, the un­prece­dented fis­cal de­vo­lu­tion that Cameron felt forced to of­fer Scot­land last week will con­front him with huge po­lit­i­cal prob­lems in the rest of Bri­tain. If Scot­land is granted the right to set its own in­come tax and spend­ing lev­els, the UK gov­ern­ment will lose ef­fec­tive con­trol of Scot­land’s bud­get deficits and that will surely in­flame op­po­si­tion in the rest of Bri­tain to the fis­cal aus­ter­ity poli­cies of Cameron’s coali­tion.

FIS­CAL LEG­IS­LA­TION

More­over, English politi­cians are al­ready ar­gu­ing (quite rea­son­ably) that if Scot­land can de­ter­mine its own fis­cal poli­cies, Scot­tish MPs should be de­prived of the right to vote on UK fis­cal leg­is­la­tion from which Scot­tish vot­ers will be ex­empt. Th­ese de­mands raise the prospect of another con­sti­tu­tional up­heaval for which Cameron seems un­pre­pared, adding to the im­pres­sion of his gov­ern­ment’s com­pla­cency and in­com­pe­tence.

Thirdly, if the To­ries do win the 2015 gen­eral elec­tion, an EU ref­er­en­dum will loom in 2017 and the re­sults now ap­pear much more un­cer­tain. Not only will Cameron’s weak­ness al­low his party to be­come more far more Euroscep­tic, but the Scot­tish ex­pe­ri­ence has shown that vot­ers may be will­ing to defy a united front of the main po­lit­i­cal par­ties, the me­dia and the business com­mu­nity-and daringly over­turn the sta­tus quo.

Fi­nally, as in­ter­na­tional in­vestors look more closely at the Bri­tish po­lit­i­cal land­scape they will no­tice that the al­ter­na­tive to a Con­ser­va­tive vic­tory next May would be the elec­tion of a Labour Party or Labour-Lib­eral gov­ern­ment com­mit­ted to prob­a­bly the most rad­i­cal shift in poli­cies on taxes, pub­lic spend­ing, fi­nan­cial reg­u­la­tion, labour mar­kets and business in­ter­ven­tion that Bri­tain has seen since the 1970s. They will also no­tice that vot­ing in­ten­tions, as of to­day, strongly favour a Labour vic­tory – and that the strong eco­nomic re­cov­ery still shows no sign of shift­ing pub­lic opin­ion in favour of the Cameron gov­ern­ment.

Of course, polls to­day do not re­veal how peo­ple will vote eight months from now. But the fea­ture of the po­lit­i­cal land­scape that in­vestors should find most trou­bling-and frankly sur­pris­ing-is how lit­tle move­ment there has been from Labour to the To­ries in the past 12 months, de­spite the un­ex­pected strength of the Bri­tish eco­nomic re­cov­ery.

For the To­ries to win a majority in May they will need an eight or nine point ad­van­tage over Labour and to lead another coali­tion gov­ern­ment by re­main­ing the largest party in par­lia­ment they will need about five points. So far, there has been no sign of any such move­ment in pub­lic opin­ion. Most in­vestors and many an­a­lysts (in­clud­ing me) ex­pected an up­surge of support for the To­ries as the elec­tion ap­proached, but the events in Scot­land have made this shift of opin­ion to­wards the To­ries much less likely.

In sum, the UK is likely to sur­vive the ref­er­en­dum. But in­vestors should not ex­pect a big re­lief rally. After the Scot­tish vote, the whole of Bri­tain will face a po­lit­i­cal choice be­tween the devil and the deep blue sea: ei­ther a tax-rais­ing Labour gov­ern­ment or a Con­ser­va­tive-led gov­ern­ment dom­i­nated by Euro-pho­bia. Nei­ther seems an at­trac­tive prospect for in­vestors in ster­ling and other po­lit­i­call­y­sen­si­tive as­sets in Bri­tain.

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