Independent Scotland Could Suffer Iceland-Style Financial Collapse - S&P

Ratings agency Standard & Poor's has warned the markets that an independent Scotland could suffer a financial meltdown similar to that which decimated Iceland in 2007.

According to a note by S&P, if Scotland decided to end its 307-year union with England on 18 September this year, the country's banking system would immediately come under strain from the hefty assets on its balance sheet, and possibly forfeit the support of the rest of Britain.

"We note a possible parallel here with Iceland, where in 2008 the national deposit insurance scheme could not honour claims when the country's outsized banking system failed," said S&P.

"The willingness and ability of the Scottish government to support its banking sector appears challenging."

In 2007, Iceland's banking system's assets stood at 880% of the country's GDP. Currently, Scotland's banking system's assets stand at a huge 1,254% of its GDP.

S&P added that "important considerations and uncertainties" could hit bank ratings, including the existence of a Scottish central bank and other significant changes to regulations and currency.

S&P's note follows closely after its market rival, Fitch, warned the markets that Britain's credit rating would hinge on the terms of the agreement between UK and Scotland, if the latter decided to end the 307-union following the referendum later this year.

According to the rating agency's latest research note, Scottish independence would create moderate risks for Britain's public debt, external finances, currency and banks.

"A 'yes' vote would be followed by a transition period, where many details would need to be agreed ranging from political and legal issues to economics, finance and trade," said analysts in a statement.

The National Institute for Economics and Social Research (NIESR) also said that an independent Scotland would immediately have to repay £23bn (€28bn, $39bn) worth of debt in its first year.

According to NIESR's macro-economist Angus Armstrong, Scotland's debt is set to hit £1.7tn by 2015-16 and therefore the debt repayment calculation is based on the Scottish National Party's repayment pledge at a 1.65% interest rate.