Here’s How Scottish Independence Could Trigger A Feedback Loop Of Financial Doom

DINA SPECTOR

 SEP. 13, 2014

The U.K. can expect “considerable financial turbulence” if Scotland goes independent, Credit Suisse warns in a new report on Friday. 

The biggest issue Scotland will face if it cuts ties with the U.K in the upcoming Sept 18. Independence referendum will be what to use for currency. Will Scotland continue use the pound, create its own money, or join the Eurozone?

“Uncertainty over the currency arrangements Scotland would adopt and its extremely large financial sector would create a disequilibrium that financial markets would seek to balance through capital flows and distress,” Credit Suisse writes. 

The firm — which previously warned that Scotland could “fall into a deep recession” if it leaves the U.K — predicts that such uncertainty will drive financial institutions (which make up large share of total employment and GDP) out of Scotland. 

A flow diagram from the report, shown below, “explains how the uncertainty over Scotland’s currency and ability to backstop its financial sector can set in train a self-fueling feedback loop of rising risks and costs to the Scottish financial and sovereign sectors, and a steady migration of capital, activity, jobs and taxes,” the report said. 

Credit Suisse