Scotland faces risk of capital flight

An independent Scotland faces the risk of “capital flight” if it cannot strike a deal to keep the pound, reports The Telegraph.

“If Scotland votes ‘Yes’ in September there will be a substantial amount of negotiations which need to be conducted, the most important financially being the choice of monetary regime, allocation of oil revenues and apportionment of public debt,” said Deutsche Bank in a 16-page analysis of the financial implications of Scotland splitting from the Union should Alex Salmond’s Yes campaign succeed.

The German lender has detailed a possible scenario comparable to that seen in some eastern European countries following the collapse of the Soviet sphere of influence in the early 1990, whereby money would flow unchecked out of the Scotland while Edinburgh frantically tried to persuade Westminister to allow it to keep sterling.

“A new Scottish currency could also trigger capital flight by worried savers ahead of any decisions being made,” wrote George Buckley, Deutsche Bank’s chief UK economist.

“Moreover, capital controls may not be appropriate for such a small open economy as highly dependent on international finance as Scotland.”

An agreement that would allow an independent Scotland to keep the pound is unlikely. Chancellor George Osborne has repeatedly ruled out the possibility of a shared currency should Scotland decide to leave the the 300-year-old political Union.

The creation of an independent Scottish currency could be ruinous for the majority of people north of the border, according to the report.

“It would probably mean higher borrowing costs in Scotland’s own new currency than is currently the case in sterling,” wrote Mr Buckley.

Deutsche also said that an independent Scotland would take with it liabilities of between £112bn and £145bn as its share of the UK’s £1.34 trillion national debt.

“Whatever decisions might be made in the aftermath of a vote in favour of independence, with the rest of the UK being Scotland’s most important trading partner it will be important that any negotiations leave Scotland in a financially viable position,” wrote Mr Buckley.