This week it has been claimed that independence could leave homeowners facing a rise in mortgage rates. Strutt & Parker are a London-based high-value estate agent which proudly notes in a glossy promo video that the average sale value of the houses they market is £850,000. The company has regional Scottish branch offices in Inverness, Banchory, Perth and Edinburgh.
In a report backing “Better Together”, the firm allegedly (we can’t find the report published anywhere*) repeats a claim often made by the No campaign – that if an independent Scotland walked away from its share of the UK’s debt, interest rates would rise to the point where the average mortgage would cost an extra £5,200 a year.
The entire argument rests on it being indisputable that Scotland would end up with higher borrowing rates than the rUK, but that’s a claim that needs some scrutiny.
Firstly, the Scottish Government intends to enter into a currency union with the rUK. This would mean that mortgages would continue to be derived from the Bank of England (BoE) base rate, just as now, and as such be completely unaffected. In the event of that not happening, however, and Scotland were to use Sterling informally, the No camp argues that an additional risk and cost premium would be added for operating outside the BoE regulated zone.
We already know that the UK government has agreed to accept responsibility for all UK debt no matter what, so Scotland would be legally debt free. The No campaign talks of Scotland being punished for a “default” on the debt, but a default is where debts aren’t paid, and no such default would exist because the UK government would be paying all its creditors just as it is now.
So that leaves us with only the prospect of Scotland paying higher rates on borrowing because it was seen as a bad risk, and the key argument for that is that sterlingisation would leave Scotland without a lender of last resort. Alistair Darling is especially fond of sneering at such an arrangement by comparing it to that used in Panama, which is not only a small country but foreign, and therefore automatically not to be trusted.
The Panamanian economy uses the US Dollar without being in a formal currency union with the USA. Its economy has grown at an average rate of 9.16% a year since 2010, after an unusually poor 2009 when it grew at a rate of a mere 3.9%. (The UK’s current growth rate is 0.8%.) Its per-capita GDP has doubled in the last decade.
Panama has over 78 banks operating within its borders and is currently experiencing a credit boom caused by extensive lending at reasonable rates, a situation that has led some international investors to question if Panama will become the next Singapore.
Of the 78 banks licensed in Panama, two are state-owned, 28 are international banks (allowed to accept foreign investment only), and 48 are general licensed banks. Panama banks are considered very safe bets due to the country’s financial watchdog, the Superintendent of Banking.
It is a financial system that, as noted by the Adam Smith Institute in its advice to Scotland to adopt sterlingisation, is the seventh most stable in the world:
“An independent Scotland could flourish either by using the pound sterling without the permission of the rUK (or by setting up a “ScotPound” pegged to sterling through a currency board, which would achieve a similar end). This ‘sterlingisation’ would emulate a number of Latin American countries that use the US Dollar without an official agreement with the US government.
“Scotland actually had this system of ‘free banking’ during the 18th and 19th centuries, during which time its economy boomed relative to England’s and its banks were remarkably secure. And Panama, which uses the US Dollar in this way, has the seventh most stable financial system in the world.”
The Superintendent of Banking strictly monitors all bank activity in Panama, and as a result banks don’t tend to fail. When a problem does arise, the Superintendent has the oversight, powers and authority to take action.
For instance, when the Stanford Bank in the West Indies island of Antigua went bust, the Panama subsidiary of Stanford was closed and had its assets frozen. The US authorities handling the case against Allen Stanford tried to seize the Panamanian assets, but the Panama Banking Superintendent wouldn’t allow it. After 18 months, Stanford in Panama was sold to a group that reopened as Balboa Bank (still in operation today) and all of the Stanford Panama clients had their funds returned.
So it’s clear that the level of risk that a bank is gauged to possess is dependent as much on the financial oversight of the banking sector in which that bank operates as it is on the availability of a lender of last resort. Given the UK’s track record, stringent regulation (like that of Panama) could actually reduce the risk and once again result in lower mortgages than our southern counterparts would enjoy.
A great deal of the No campaign relies on building fear that’s based on the general public’s ignorance of issues about which they have, in normal circumstances, no reason to be interested. While Alistair Darling never explicitly attacks Panama as an unstable banana republic worthy only of mockery, he knows that because it’s never in the news, people will infer it from his contemptuous and dismissive tone.
But in fact, ironically Panama operates its banking sector on exactly the same prudent principles for which Scotland’s banks were once famed and respected worldwide for centuries, before Fred Goodwin and his casino capitalists showed up.
While it’s a moot point – there WILL be a currency union, and sterlingisation won’t happen – there would be few better models than Panama on which to base a rebuilding of the security and reputation of the Scottish banking sector.
And as a theoretical WORST-case scenario, it’s a heck of a fallback option.
* Interestingly, the only published commentary we COULD find on the referendum from Strutt and Parker was a blog post on the company website last month:
The post went on to note that in the firm’s view, a No vote was the desirable outcome, as “with the brakes of caution removed” it would cause property prices to rocket. Readers can decide for themselves whether that would actually be a good thing or not.
[EDIT 11.28am: By a freaky coincidence, the report was actually released at 11am, the exact moment we published this post at. It’s heavily littered with qualifiers and disclaimers and says basically nothing.]