Friday Letter: Stay on target

About £2.6 billion was wiped off the value of companies headquartered in Scotland this week, as the market reacted to news that for the first time, pro-Independence campaigners had pulled ahead in the polls.  

It might seem odd that while the ongoing crisis in Ukraine or the rise of ISIS in Iraq and Syria barely moved the needle in terms of global stockmarkets, the possibility of a small part of the UK breaking away caused investors to panic.

Some argue that Scottish independence could derail the UK’s economic recovery. No lesser light than Nobel prize-winning economist Paul Krugman argued it could lead to a new banking crisis.

Depending on how post-vote negotiations between the UK and Scottish governments go in the event of a ‘Yes’ vote for independence, servicing the UK’s sizeable public debt could become increasingly costly, and there are some pretty meaningful issues to be dealt with in terms of the Scottish banks. The UK has enjoyed one of the swifter recoveries in the aftermath of the financial crisis, and should it falter, it’s not unreasonable to argue that the effects would be felt elsewhere in Europe.

Without disappearing down a macro-economic wormhole though, it’s perhaps worth retaining a sense of perspective and keeping one eye on the bigger picture. The UK could stomach the loss of Scotland, of that there is no doubt (although it’s a matter of endless debate whether Scotland could actually stomach the loss of the UK), and while constitutionally it would send tremors through Britain and the Commonwealth, the political and financial aftershock are likely to be far less severe.

The point being: the sun will still rise tomorrow, the world will keep turning, and the reshaping of the financial markets in the wake of the downturn will continue apace. The private debt industry has flourished in this changing environment, particularly in the UK which has always been closer to its Anglo-Saxon friends across the Atlantic than other European nations. A Scottish vote for independence is unlikely to reverse the trend in the UK and Europe of increasing institutionalisation of the lending markets.

There’s a prize to be won here, for investors, regulators, managers – indeed all stakeholders in the financial system. If there’s a positive to be taken from the financial crisis, it’s that it afforded governments and regulators a priceless chance to think carefully about what they wanted from their banking systems, and a mandate to make changes in pursuit of that new paradigm.

Those efforts have occasionally been muddled – it’s not easy to deleverage your bank system AND increase lending to riskier SMEs at the same time – but changes have been made and the optimistic among us must hope that at the very least, the balance of change has been positive.