Billions of pounds were wiped off the value of companies with Scottish links and the pound was pummelled as markets took fright at the increasing prospect of Scotland voting to break away from the United Kingdom next week.
Investors on Monday dumped companies with exposure to Scotland, including the Royal Bank of Scotland and Lloyds Banking Group, which owns Bank of Scotland.
They also ditched sterling, which at one point fell to its lowest level against the dollar for 10 months.
"Be afraid, be very afraid," Deutsche Bank analysts warned its clients after the Sunday Times YouGov poll had showed a small lead for the yes campaign.
American Nobel prize-winning economist Paul Krugman echoed the analysts' view, warning Scotland it was unsafe to vote yes while uncertainty about the country's currency remained. "If Scottish voters really believe that it's safe to become a country without a currency, they have been badly misled," Krugman wrote in the New York Times. "The risks of going it alone are huge. You may think that Scotland can become another Canada, but it's all too likely that it would end up becoming Spain without the sunshine."
Elsewhere, a leading City banking expert warned that companies and individuals were likely to withdraw their cash from banks if the vote is in favour of a split from the union, while another economist warned independence could "easily derail the UK recovery".
Initially almost £4.8bn was wiped off the stock-market value of companies with exposure to Scotland. As well as RBS and Lloyds, companies to be hit included engineering group Weir, insurer Standard Life, fund manager Aberdeen Asset Management and energy company SSE. By the end of trading the losses had been pared back to £2.6bn after RBS kickstarted the sale of its US arm.
The taxpayer remains heavily exposed to Lloyds and RBS, which are both registered in Scotland, following the 2008 bailouts.
The mood among City professionals has changed markedly in recent days: the FTSE 100 hit a 14-year high last week and until recently there had been concerns about a strong pound hurting exports. The blue chip index slipped back to 6,834 on Monday while the currency is weakening.
At one point the pound fell to $1.6104, its lowest point since last November. As with the stock market, sterling then recovered some of those losses but was still down 1.2% on the day at $1.6142 in late London trading.
Michael Saunders, head of European economics at Citi, said everything had changed in the last week with polls now showing "statistical dead heat".
"From here the polls are looking too close to call. This is one that could go either way," he said.
Guy Foster, head of research at stockbroker Brewin Dolphin, said that stocks had recovered some of their losses after "cooler heads prevailed".
Deutsche Bank economists warned of the impact a yes vote could have. "It could at worst lead to a destabilising crisis in the whole British banking system," they said, "and at best leave the rest of the UK with an unstable currency union in which the Bank of England is forced to continue to provide liquidity to Scottish banks while Westminster thrashes out a fiscal and monetary arrangement with a new Scottish sovereign government holding all the cards. A yes vote could easily derail the UK economic recovery."
In the banking industry, there was focus on the possibility of major companies and individual savers taking their deposits from Scotland in the event of a yes vote. "Deposits would go south, but loans would remain, creating a funding gap at the same time when Scottish wholesale funding rates would likely be rising – thus exacerbating the pain," said Sandy Chen, analyst at Cenkos.
He said the UK-listed banks, except for Standard Chartered, could be affected.
Alistair Cotton, corporate trader at Currencies Direct, was also concerned about the possibility of an exodus of capital from Scotland. "Capital flight is the main concern for an independent Scotland, as financial firms will want the safe harbour the Bank of England provides. We can expect large financial firms to all move headquarters to England. Whatever decision Scotland makes on 18 September we can expect to see short to medium-term pain across the British Isles."
Currency experts were divided over how much further the pound could weaken. Trevor Greetham, a director at Fidelity Worldwide Investment, commented that "the selloff is starting to feel overdone. A strong bounce in sterling is likely on a no vote, which is still very much the most likely outcome. In the event of a yes things would get messier."
Cotton, though, said: "Markets don't like uncertainty. We can expect at least a 5% drop in the pound in the face of a yes vote – and it could be considerably more."
Roy Batchelor, a professor at Cass Business School, pointed to the uncertainty ahead of the vote. "Financial markets hate uncertainty, and this quickly gets translated into prices … The risks to the UK are trivial compared to those triggered in Scotland by the likely flight of capital and business talent if the yes campaign wins."
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