On Thursday, Scotland will take to the polls to determine whether it wants to break off from the United Kingdom. And while even a vote in favor would simply be the beginning of a long and extremely complex process, all of a sudden, markets are paying rapt attention to the potential outcome.
The upcoming Scotland vote has led investors to sell shares of Scottish companies, place bearish bets on the British pound—and worry about the widespread implications of the potential Scotland split-off.
"If you have investments in the U.K., you should be very much concerned," said Oliver Harvey, macro strategist at Deutsche Bank. "A 'yes' vote has big implications for U.K. growth and big implications for investments. And if you have assets in Scotland, all of the sudden they're not under the same tax or regulatory regime."
While most expect Scotland to eventually vote against independence, the polls have certainly been close. Many U.S. investors only started to pay close attention when a YouGov poll last weekend showed a narrow lead for independence voters. More recent polls have shown a lead for those voting against the move. Still, the "yes" vote has been broadly gaining momentum, and many likely voters report that they are still undecided.
On Friday, online betting sites were offering a payout of about 3-to-1 for a "yes" vote bet versus 2-to-9 for a "no" bet, indicating that a pro-independence result is being viewed as an unlikely, but not outlandish, scenario.
Meanwhile the pound has fallen dramatically against the U.S. dollar over the past two weeks, reflecting fears about what Scottish independence would mean for the British economy and currency. Scotland is a major producer of crude oil, and it remains unclear how Scotland and the remaining U.K. would divide up its energy resources. And Scotland's currency options remain hazy and extremely complicated.
In Scotland, many companies—including major banks Royal Bank of Scotland and Lloyds—have said they will move to England if Scotland votes for independence. Shares of the two banks have been under pressure recently, though they have staged a rebound over the past few sessions.
Harvey said that investors can be reassured by the fact that banks would move (at least technically) and that Bank of England Gov. Mark Carney is actively working to avoid a disaster scenario. It seems that in a "yes" vote situation, if RBS and Lloyd's move to England, the BOE will remain their lender of last resort. That should prevent a massive capital flight, or a great degree of risk for those holding Scottish assets.
"It's not a great outcome, but at least a very disruptive outcome will be avoided," Harvey told CNBC.com. "Basically, what's going to happen is that there will no longer be a Scottish banking sector."