Day: September 17, 2014

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iScotland would be forced to create its own currency, says top economist

Elite Forex Blog - Market Research & Analysis
A YES vote in tomorrow’s ­referendum would force a newly independent Scotland to create its own currency, one of the country’s leading economists has warned, after a damning report concluded Alex Salmond’s fallback plan to keep the pound would collapse within a year.

In a separate study yesterday a major European bank raised fears of a stock market slump and a scramble to withdraw savings from Scottish bank branches on Friday morning if there is a Yes vote.
Dr Angus Armstrong, of the National Institute for Social and Economic Research (NIESR), said “a Yes vote is a vote for Scotland’s own currency,” after the think-tank published a scathing assessment of the First Minister’s apparent “Plan B” in the event the UK rejected his preferred option of sharing the pound in a formal currency union.
Mr Salmond insists a currency union would be agreed but, if not, has suggested an independent Scotland would use the pound informally, a process known as “sterlingisation,” while refusing to pay its share of the UK’s ­ £1.4 trillion national debt.
The NIESR has previously argued that sterlingisation would be unstable and damage the Scottish economy as financial institutions moved their headquarters south of the Border.
In a report yesterday, it argued that refusing to pay a share of the UK’s debt would cause serious additional problems.
Walking away from the debt, argued Dr Armstrong and the report’s co-author Monique Ebell, would be “seen as a default” by the money markets, leaving an independent Scotland struggling to borrow and facing “unprecedented austerity” in the form of spending cuts.
The move would also be likely to leave Scotland out the EU, as Germany sought to protect its interests and blocked the newly independent state’s membership, the report warned. It argued Europe’s biggest ­creditor would fear a default by Spain, whose finances would come under pressure if Catalonia also became independent without paying its debts.
Dr Armstrong said: “A Yes vote is a vote for Scotland’s own currency. It seems to be the only option that makes sense.
“If Scotland votes for independence I think it would end up with its own currency. There’s a question of how it gets there, but it gets there.”
He said the transition to a new currency could be managed stably within the 18-month negotiation period that would follow a Yes vote.
Meanwhile Swiss bank UBS, which predicts a No vote, warned yesterday of a three per cent slump in the FTSE 100 index and a three per cent drop in the pound against the dollar on Friday if Scots choose instead to leave the UK.
Paul Donovan, global economist at UBS, said bank accounts could be moved from Scottish branches, despite assurances savers would continue to be protected by the Bank of England as independence negotiations took place.
“I wouldn’t like to predict it, but we may get Friday off,” he said, suggesting a bank holiday may have to be called.
Dr Armstrong played down speculation that a Yes vote would trigger panic on Friday morning if Scots vote to leave the UK.
He said a clear statement from the Prime Minister, stressing Scotland’s continued place in the UK until 2016, would limit the pound’s losses on the currency markets and prevent a run on the banks.
The UK Government and Labour opposition have ruled out Mr Salmond’s proposal for a currency union, arguing it would be too risky for the UK and impose too many constraints on an independent Scotland’s economic policy-making.
Mr Salmond has claimed they are “bluffing”. He has said the prospect of Scotland walking away from its share of the debts, worth about £5 billion per year in repayments to the Treasury, and the loss of exports such as oil and whisky from the UK’s balance sheet, would force a currency union to be agreed.
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The Origins and Implications of the Scottish Referendum

GIHAdmin

The idea of Scottish independence has moved from the implausible to the very possible. Whether or not it actually happens, the idea that the union of England and Scotland, which has existed for more than 300 years, could be dissolved has enormous implications in its own right, and significant implications for Europe and even for […]

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Russia Central Bank Responds To Domestic Dollar Shortage, Starts Currency Swaps

Elite Forex Blog - Market Research & Analysis
With the Ruble hitting record lows once again today against the USDollar, it appearsconcerns over USD liquidity are growing in Russia. The Russian central bank has unveiled an FX swap operation, allowing firms to borrow dollars in exchange for Rubles for a duration of 1 day (at a cost of 7%p.a.). Of course, this squeeze on USD funding – driven by Western sanctions – will, instead of isolating Russia, force Russian companies (finding USD transactions prohibitively expensive) into the CNY-axis, thus further strengthening the Yuanification of world trade and the ultimate demise of the USD as reserve currency.
USDRUB at record lows…
And funding sanctions appear to have driven the Central Bank to supply USDollar liquidity into an apparently squeezed market…
As Bloomberg reports,
“Sanctions and closed access to foreign-exchange liquidity from the West” is feeding demand for dollars, Dmitry Polevoy, chief economist ING.
Foreign-exchange liquidity has “virtually dried out,” with volumes sinking to about $100 million per day, compared with $1 billion to $2 billion previously, according to Natalia Orlova, the chief economist for OAO Alfa Bank in Moscow.
…
Companies have $22 billion in dollar-denominated payments to make in September and local banks are “anticipating demand for hard currencyfrom retailers and accumulating additional dollar liquidity,” Abdullaev said.
And as WSJ reports, the central bank has responded…
The Bank of Russia said Tuesday it introduced one-day currency swaps to aid banks “better management of the their short-term liquidity”.
Russian banks, unable to borrow abroad, are experiencing a shortage of currency liquidity.
“We see, naturally, some distortion on the (currency) swap market, which shows a structural deficit of dollars,” Russia’s Deputy Finance Minister Alexei Moiseev said Tuesday.
Russia will create a multi-billion dollar anti-crisis fund in 2015 of money destined for the Pension Fund and some left over in this year’s budget to help companies hit by sanctions, Finance Minister Anton Siluanov was quoted as saying on Monday.
…
Siluanov was quoted as saying by Russian news agencies that the decision to stop transferring money to the Pension Fund would hand the budget an extra 309 billion roubles ($8.18 billion US).
He said not all of that sum would go into the anti-crisis fund, but that it would also receive at least 100 billion roubles of money left over in this year’s budget.
“This 100 billion roubles will be added to the [anti-crisis] reserve next year, which will allow us to help our companies,” RIA news agency citied Siluanov as saying.
“We are planning to create a reserve of a significant size.”
It was not clear how big the fund would be.
…
“When a series of our partners, if they can be called that, test Russia’s strength through sanctions and all kinds of threats, it is important not to succumb to the temptation of so-called easy solutions and to preserve and continue the development of democratic processes in our society, our state,” Medvedev said in a televised speech.
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Increasingly making it prohibitively expensive for Russian firms to transact in USDollars…
Which will merely serves to drive those firms to look for Chinese counterparts and further into the CNY-axis of de-dollarization (as UK Chancellor Osborne recently confirmed).
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