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Why we shouldn’t do walking away

Posted on March 04, 2014 by

When former chancellor Alistair Darling said the following during the currency row, he should have known better (and no doubt did):

“The nationalist threat to default on debt if they don’t get their way on currency is reckless. The impact of Alex Salmond’s default would be to say to the world that we cannot be trusted to honour our debts.”

The empirical fact is that an independent Scotland would not be defaulting, reneging on, or walking away from anything. That’s because the UK government has already taken full responsibility for all debt accrued up to the date of Scottish independence.

wienerkongress

So we can just forget about it, right?

There’s nothing in international law to say otherwise. The responsibilities of a new state, whether replacing or splitting from its predecessor, are ill-defined. Two mammoth UN-sponsored conferences and two subsequent Vienna Conventions have failed to come up with a workable legally-binding solution.

The Vienna Convention of the Succession of States in respect of Treaties (1978) and the Vienna Convention on Succession of States in respect of state property, archives and debts (1983) have achieved the grand total of 37 signatories and 14 signatories respectively out of 193 members of the United Nations. That’s not much of an endorsement, and the UK – although highly active in drafting both conventions – has signed neither of them.

In the absence of binding international law, “custom and practice” are the only guides to what happens to assets and liabilities when one or more states split off from a predecessor or achieve independence. Effectively there are only two choices: split the assets and the liabilities or take the “clean slate” route, whereby the continuing state inherits debt and assets and the new state starts afresh.

Under most circumstances, splitting of assets and debt is the norm, because continuing states take the line “if you want to secede, you must take your share of the debt with you” – and that’s what usually happens. But things don’t always go smoothly. Let’s look at a few case studies.

Agreement to establish the Irish Free State (1921)

Article V of this treaty agrees that the Free state assumes liability for its share of UK debt and pensions. Following the costs of the civil war – fought over this very treaty – Ireland was unable to service its debt. The UK assumed responsibility for all of it. In return, it got a freer hand over establishing the final status and boundaries of northern Ireland

Dissolution of the Soviet Union (1991-1993)

Between eight and eleven of the former Soviet republics signed up to different articles of the Interstate Agreement on the Succession of External Debts and Assets of the USSR taking on their share of servicing the USSR’s debt. But in the chaotic circumstances of the time, they made no payments, leading Russia eventually to assume responsibility for all USSR debt.

The added burden was too much, and Russia went through various debt restructurings and eventual default before paying off the last $45billion in 2006. (can anyone spot the delightful typo in this Pravda report?)

The Velvet Divorce (Czechoslovakia 1993)

Neither country claimed to be the continuing state. Assets and liabilities were split on a population basis (2 to 1). Both countries agreed to use the Convention on Succession of States in respect of state property, archives and debts as a basis for negotiation.

This is probably the most successful example of an independence settlement in the last century. Unfortunately, because of population disparity, the UK’s “great power” status, and its likely insistence on being the continuing state, it is unlikely to become a model that Scotland/rUK can use.

Quebec-Canada (1995)

This split ultimately didn’t happen, but that didn’t stop speculation about the division of assets and liabilities. A fascinating paper, “International aspects of the division of debt under secession: the case of Quebec and Canada”, goes into the question in some detail. It contains a distinct note of warning about any failure to settle division of debt fairly and promptly, which we’ll come to shortly.

Where all these cases differ from the Scottish/rUK scenario is that not one of these continuing states initially agreed to shoulder all the debt by itself – they all agreed to split both assets and liabilities. So why has the UK government done something different, and so apparently obviously not in its interest?

There can be only one rational answer: so fragile is the UK’s creditworthiness that any uncertainty at all about how its external debt would be split and serviced after Scottish independence might have put pressure on its cost of borrowing. Any rise in that cost and the UK’s debt burden would look even more unsustainable than it already does, leading to a further rise, and so on, into a Greek-style economic death spiral.

That’s a position that the UK is so desperate to avoid that giving Scotland the ability to walk to independence debt-free has been calculated to be a price worth paying.

Should Scotland walk away, then? (A separate question from the ability to walk away.) The answer is that it almost certainly shouldn’t, currency union or no. But why?

1. Without any assets inherited from the UK, Scotland will need to borrow, not just to smooth out its cash flow (like using an overdraft), but also to finance the (considerable) costs of starting from scratch.

To put it simply: if we can inherit a frigate from rUK, and in return take on the equivalent debt at, say, a negotiated 2%, it makes more sense than having to borrow to build one from scratch at 3.5%, if that’s all the lenders would offer us.

2. No matter how hard Scotland protested, potential lenders might still consider that Scotland has somehow shirked its responsibilities. This is why the No campaign is bombarding us with talk of defaulting and reneging. Perception counts, and the paper on Quebec mentioned above carries this warning:

“The lessons on debt division to be derived from the sovereign debt literature are unequivocal. The repudiation of foreign debt is not a viable option for a country interested in maintaining extensive international economic or diplomatic relations.”

If perception is hostile, no matter what Standard and Poor’s say, Scotland might find it hard to borrow at a reasonable rate. The counter-argument to that says that freed of of the billions of pounds it contributes every year towards the UK debt, Scotland’s borrowing would be so much lower that it could afford to pay a slightly higher rate for it. That’s where the final and key point comes in, and perhaps holds the explanation of why Salmond is sticking so doggedly to Plan A.

3. If the rUK has to take on the whole of its debt without Scotland paying a share, its financial position begins to look truly horrible. But that’s not good news for Scotland – it’d be left using an increasingly vulnerable Sterling (or an untried currency with no tested lender of last resort) and with its biggest trading partner in deep trouble. The dead weight of the UK could drag us down with it. Scotland is trapped in an unwilling suicide pact.

So it’s in Scotland’s interests to reassure the markets, establish its own credibility, and relieve the pressure on rUK by accepting a share of the debt, in exchange for London’s support over the EU, NATO and so on. Anything else would be a high stakes face-off, and could do a lot of damage to both sides.

explosives

Seen in that context, Darling’s disingenuous talk of “default” is not only cynical propaganda but dangerous brinksmanship. In essence, he’s hurling sticks of gelignite across the card table, knowing that if Salmond stops fending them off for a moment to try to play his hand, the explosion will kill them both. The former Chancellor is hoping that the watching electorate will be so terrified by the spectacle that they’ll call a halt to proceedings entirely (by voting No).

So the First Minister can’t turn his back or call the bluff, but must hold his nerve and keep fielding the projectiles until the crowd realises that the champion of the Union’s strategy is doomed: if nobody lets their fear get the better of them, come October the box will be empty and the rUK will have to play the game.

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    107 to “Why we shouldn’t do walking away”

    1. Vincent McDee says:

      Wonderfully put Leslie, particularly the last two paragraphs and the: “if nobody lets their fear get the better of them, come October the box will be empty and the rUK will have to play the game” is an award winner.

      O/T This is beyond terror: “Those who rely on foodbanks often walk for miles as they cannot afford to pay for transport, and many are given items that can be eaten cold because they are unable to pay for electricity in order to cook, the committee heard”

      “http://www.heraldscotland.com/news/home-news/foodbanks-rise-linked-to-reforms.1393938919

    2. Smith says:

      Is there any definitive analysis of what iScotland’s share of UK assets would be?

      Wouldn’t our asset share and liability share roughly cancel each other out?

      Everyone talks about share of debt, but it might be a redundant point when asset share might fully offset it.

    3. wingman 2020 says:

      Unfortunately KABOOM is more likely than PHUTT

    4. Scott says:

      O/T
      Alex Salmond council ‘ban’ motion in Aberdeen set to be abandoned.
      The authority’s deputy leader, Marie Boulton, has now said talk of a ban was a “slip of the tongue”.
      There was no way this was a slip of the tongue as we all saw and heard Willie “daft” Young call AS a bully and this was the way to treat bullys,who has clipped his wings I wonder.

    5. Cath says:

      “So the First Minister can’t turn his back or call the bluff, but must hold his nerve and keep fielding the projectiles”

      My preferred position is new currency, partly based on seeing how Westminster is behaving and not trusting them to leave any power with them after a yes.

      But this statement at the end is a critical point, for a lot of reasons I think. All of us in the Yes camp, whatever our position on currency, should be supporting him and the SNP in holding their nerve, and sticking to the policy they claim to (and probably do) believe in, and which is backed by the fiscal commission and many in business.

      The actual decision and negotiation on currency is for – and only for – after a yes vote has happened. And democracy dictates that all options still need to be on the table, and those who favour a CU still represented.

      We all know whatever was put up as plan A would have been shot to pieces – that is the No camp’s tactics. And anything put up as plan B will be similarly shot to pieces.

      I will never, ever, as long as I live forgive Labour for their part in this, or be able to look at or listen to Darling without wanting to stick a brick through the TV.

    6. Appleby says:

      I still don’t see why we should pay for a debt we did not accrue and did not even benefit from. We’ve been running at a surplus with our pocket money payments. It’s like paying someone to be robbed by them. The UK’s madness is what we’re trying to get away from and through this we will be tied to it and the consequences of massive borrowing and debt given to countless future generations.

      You’ve a good argument though and I’d weigh in in consideration with how the other side are behaving. If they play ball then perhaps your suggestions would be best. If they decide to push us out in the cold then there’s little reason for us to burden ourselves with helping with their debt.

      There’s also the consideration that perhaps there’s simply not enough from the rest of the UK that will justify the cost or offset the sum of debt. There’s only so many frigates or baubles they can offer us in return. No thanks to worthless aircraft carriers or nuclear missile subs either. Same for many of the overpriced junk items they’ve pumped millions into that we’ll not want or can simply buy cheaper on open market.

      It could work out much better in the long run to accept the potential for small increased costs in limited borrowing in return for instant debt clearance with no more need to worry about repayments for generations. Especially as we operate at a surplus and we really shouldn’t have a government borrow endlessly anyway. National debt is half the problem.

    7. TheGreatBaldo says:

      I think I’ve pointed out on here before but on the morning of Sept 19th after a YES (perhaps even earlier) the tables completely turn as rUK will need agreement from Scotland to pay it’s debts in full.

      Regarding reneging/’default’….what will go in Scotland’s favour it hasn’t just made 1 but 2 offers to service the debt within the White Paper based on previous precedent.

      If Osbourne does press the nuclear button….then Scotland can rightly claim that it was intransigence and by Westminister that meant it did not assume any of the UK debt.

      I have a sneaky suspicion we will get another Fiscal Commission report (probably in May/June) giving their advice on what will happen if rUK says NO and how a Scottish Pounds could/should be launched.

      Scare bomb defused and the clock ticking on Osbourne/Balls coming to the table

    8. Murray McCallumlsfc1999 says:

      Scotland “taking on” some of the debt would surely mean a massive debt restructure and a bonanza for the City of London. Already issued debt would have to be legally reassigned to a new entity; Scotland.

      Let’s try to keep the bankers out and the lawyers to a minimum.

      Much simpler for Scotland to commit to pay interest to rUK for a fixed number of years.

      Alimony of you like. The length and level of this “alimony” is what is negotiated.

    9. Murray McCallum says:

      Scotland “taking on” some of the debt would surely mean a massive debt restructure and a bonanza for the City of London. Already issued debt would have to be legally reassigned to a new entity; Scotland.

      Let’s try to keep the bankers out and the lawyers to a minimum.

      Much simpler for Scotland to commit to pay interest to rUK for a fixed number of years.

      Alimony of you like. The length and level of this “alimony” is what is negotiate

    10. bald eagle says:

      vincent Mcdee

      cough andrew cough his last names leslie

    11. Cath says:

      on the morning of Sept 19th after a YES (perhaps even earlier) the tables completely turn as rUK will need agreement from Scotland to pay it’s debts in full.

      Not to mention on how fast we’d like Trident removed. I can’t quite figure out with Trident whether the UK really have been fingers in ears over that and not even considered a yes vote a possibility, or whether there are contingency plan which are just top secret.

      But speed of removal certainly seems like a decent hand, even though here as well I presume internationally we wouldn’t get away with playing really silly buggers over it.

    12. Angus McLellan says:

      This article is taking a very narrow view of UK assets and liabilities. It cannot be all about the national debt and just ignoring the other liabilities, of which there are many. The key document here is the latest Whole of Government Accounts [the linked doc is the 4-page summary, the whole thing runs to 232 pages].

      The headline figures tell us that at 31 March 2012, government across the UK (as defined in WGA) had assets of £1,268 billion and liabilities of £2,615 billion. It shouldn’t be news that £2,615 billion is very much larger than just the national debt, which then stood at only £966 billion (or 37% of total liabilities), leaving a mere £1,649 billion (one point six trillion pounds) which is ignored in this article and almost everything else which gets written on the subject.

      It would be remarkable, I think, were divisible assets to be shared on the same basis as only 40% of liabilities, completely ignoring the other 60% (or more, because WGA isn’t the only game in town when it comes to figuring liabilities). Exactly what assets are divisible depends upon who you ask, but the WGA cheat-sheet gives a simple breakdown into property, plant and machinery (£745 billion) and financial and other (£523 billion). (Just as with liabilities, the WGA isn’t the only way to count assets, for reasons which are explained in the notes to the accounts in the full report.)

    13. Ghengis D'Midgies says:

      Mortgages rates to rise in England if no currency union with Scotland is agreed. Catch that one Darling and Osborne.

    14. The Man in the Jar says:

      I can’t help wondering that as a Yes vote becomes more likely if the big international money men will react. These people are sharks compared to the mere minnows of Standard Life and RBS. The sort of people that will only attend a meeting if they are accompanied by a team of their own lawyers. Are they going to wake up and look at the figures and see the proposals of the SG as the sensible option.

      If so what will they do about it. I would hope that Osborne will be summoned to a meeting in the city where he will be bent over a desk and given a “damn good thrashing” (insert public schoolboy gag here) for being so f*****g stupid. It looks like Osborne and co will happily trash the fUK`s economy for no other good reason than pure spite. Some way to run an economy!

      We can only hope. And just imagine what the climbdown would be like.

    15. Ivan McKee says:

      Bhuna, Madras, Vindaloo, Korma, Biryani, Jalfrezi, Tikka Masala, Rogan Josh, Dhansak.

      Do I win the prize Andrew ?

    16. stevenluby says:

      Scary. Uk doesn’t agree on sharing Sterling but we receive no assets and walk away with approx 130-150 billion in Sterling debt! Or,we borrow less than the share of the UK debt,pin a new currency to whatever other than the bankrupt UK Pound and start again. Of course we could all come up with various scenarios of which we could all be wrong. I don’t buy into the Scots Gov attitude that Westminster will relent after a Yes vote. But then I don’t trust the UK to abide by International Law either. As for walking away,its only been the No Camp that have thrown that into the arena but it appears to me people within the Yes Camp are now a little worried about dropping the debt and walking if the negotiations exclude Sterling,as the idea gains traction. I’m all for a Scots currency and let business suck it up,they have had billions received in ‘welfare’ for far too long. Time Scotland invested in itself,with its own money! For the wealth this country has and only 5 million+ people,it won’t take 130 billion+ in Sterling to make that happen.

    17. R whittington says:

      Love how you guys like to analogise the debate as a game. If Salmond plays his cards right… Winning hands.. etc Unfortunately the issue of Scotland’s future is not a game and people’s lives should not be played with for the sake of anyone’s vanity.

    18. MochaChoca says:

      For a while I was quite comfortable with Scotland servicing a share of the UK debt, but the UK’s ‘hardball’ stance is wearing down any enthusiasm I had for this.

      rUK have assumed 100% liability for the debt. The creditors will still be paid, so who exactly will be accusing us of defaulting? any actual default will be squarely on the ‘broad shoulders’ of the rUK.

      Is there a precedent for an organisation taking on a massive liability they have no legal obligation for? Sounds a bit unlikely.

      Perhaps a follow-up referendum is the way to go, let the people decide on questions such as debt (do we service a share or not), currency (preferred choice, if formal union really is off the table), EU membership (stay in or opt out? a ‘stay in’ majority wouldn’t do our prospects of actually ‘staying in’ any harm) NATO etc etc

    19. Bugger (the Panda) says:

      I think the Scottish Government should commission the design of new set of Scottish Groats from a German currency printer and order up, awaiting confirmation, a suitable quantity of appropriate paper of the right quality, before the start of negotiations.

      That should put the wind right up’em Captain Darling, Sir?

    20. Bugger (the Panda) says:

      R Whittington says:

      They started playing at childish public negotiations first.

    21. Ron Burgundy says:

      The UK economy is a debt ridden bankrupt. All the talk of “recovery” is a fantasy as is “we are getting on top of the deficit” – OK their annual borrowing is down to £100 billion and not £150 billion in 2012 – a bit like saying I am on top of my smoking habit I am down from 60 a day to 40.
      # The top 4 banks are ALL bust – zombies in effect kept alive only by handouts from Osborne.
      # The trade gap is huge and productivity collapsing.
      # The UK needs to borrow or print £100 billion each year to cover their annual expenditure – which when they cannot pay it off is added to the £1.5 trillion National Debt.
      Interest rates are at a 300 year low and can only go one way and when that happens
      (a) Westminster will have to pay higher repayment rates to foreign creditors like the Chinese on any fresh credit. At the moment interest on debt is at £50 billion a year. When rates go up this will soar putting pressure on the other areas of public expenditure – CUTS will be deep and savage
      (a) Higher interest rates will also cause a banking bust because they will run out of money to pay depositors higher returns and mortgage defaults will be widespread.

      I am saying all of this because as Andrew mentions the UK economy is a basket case – Never reported by the BBC – all propped up by a money printing bubble ( Help to Buy is the classic manifestation )

      They are in the shit and cannot pay off THEIR debt without a Scottish contribution but they are playing high stakes Russian roulette hoping that we will fold first through fear of the lack of a Currency Union. But their position of perceived strength on the currency issue is an elaborate deception to conceal their REAL weakness.

      In the campaign we need to big up on the story of the British economy being a disaster with some facts and figures pumped out to people so they can see how much Westminster is in the shit economically to show how nonsensical their position is.

      I would myself NOT like to see a formal currency Union with the rUK as they are a failed state in the economic sense.

      I would much rather we had our own Scottish Pound pegged to Sterling as an interim step – in much the same way the Danes use the Knone / Euro before joining a revitalised Euro zone in the future.

    22. TJenny says:

      There’s an article on Bus for Scotland’s site from Asset Scotland, giving the total of the assets that would accrue to an Indy Scotland by population share.

      Shows total to be £109,000,000,000.:-)

      http://www.businessforscotland.co.uk/independence-will-generate-a-109000000000-asset-windfall-for-scotland/

      Asset Scotland also have a Twitter feed, @AssetScotland, where they regularly detail our share of individual MoD, overseas assets, embassies etc.

      https://twitter.com/AssetScotland

    23. Betty Boop says:

      Good article, Andrew. I reckon we should go for the USSR option and pay the debt in curry. We have some rather fine curry houses and I am sure they could come up with some premium platters.

    24. kininvie says:

      @Ivan

      You win! The thought of $45 billion worth of curries is enough to keep anyone going…(sorry)

      @smith
      Speaking of valuing assets against liabilities, I believe at the break-up of the USSR, Ukraine was keen to take its share of USSR external debt & assets becuase it thought that USSR property abroad was massively undervalued. There’s also a tale that Ukraine believed there was a big deposit of gold in the bank of England dating back to Tsarist days (which there wasn’t). How true that is, I do not know

    25. seoc says:

      Westminster seems to associate ‘default’ with a Scotland – who has no debt and therefore cannot default – perhaps to disguise the impossibly heavy indebtedness that they, themselves have run up.
      Like any reckless borrower, they now try to hide the full extent of their profligacy.
      They are unfit for purpose.

    26. MochaChoca says:

      TJenny,
      My reading of that article was that this is the total value of assets due to Scotland, but our assets are largely already situated here. There may be some ‘cash value’ redistribution, due to a disproportionate amount of the assets being outwith Scotland, but this redistribution will be a small fraction of the £109bn. I think.

    27. chalks says:

      We should give them all the Korma in Scotland.

      It’s pish.

    28. Gillie says:

      Dump the debt, we have £1.6 Trillion in the Bank of the North Sea and 40-60 years of oil and gas revenues at hand.

      PS I see Aberdeen councillor Willie Young is tilting at windmills.

      http://www.eveningexpress.co.uk/news/local/first-minister-ban-plan-still-stands-says-willie-young-1.252528

    29. TJenny says:

      Bad Korma? 🙂

    30. Erchie says:

      @R Whittington

      I don’t love how you guys try to personalise this as one man. That insults not only us, but all involved in this struggle for a fair and equitable representation since the founding of the SHRA 140 years ago.

      By personalising this you say you have no confidence in your case, and must resort to fear, uncertainty and doubt

    31. NorthBrit says:

      I spend a significant part of my time dealing with bond investors and rating agencies.

      Bond investors and rating agencies are only concerned with payment of contractual obligations. They disapprove of moral hazard (i.e. taking on other people’s financial obligations).

      There is no merit in this continued suggestion that taking on more debt than legally necessary might be a good idea.

      Investors will not assume that Scotland is likely to default on its own obligations because it refused to take on any of England’s.

      The rating agency position is no different and is clear: they are only concerned with a sovereign’s ability to pay contractual debts that it regards as its own – see Appendix A of S&P, p.4 of Moodys:

      http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245350156739
      http://www.moodysanalytics.com/~/media/Microsites/CRRM/2012/Sovereign%20Research/2012-30-07-Sovereign-Default-and-Recovery-Rates.ashx

      “Standard & Poor’s takes no position on the propriety of government debt defaults, repudiations, and the like. Standard & Poor’s also does not take a position on the course of negotiations (or the absence thereof) between creditors and the government about working out debt that is repudiated, or on the parameters of any settlements between creditors and governments that could occur. Instead, Standard & Poor’s ratings are an opinion of the probability of default on a forward-looking basis. We analyze historical defaults to form our own view as to the extent that they could affect the likelihood of the sovereign defaulting in the future.”

      The ideal position for Scotland is the lowest debt amount that can be negotiated.

      If people are going to write articles like this one they should also deal properly with the mechanics of how Scotland might assume debt in a way that is helpful to the UK.

      For example, the “split” route described by John McFall here would be a default by the UK:
      http://www.youtube.com/watch?v=emSHhieRhXU#t=2m43s

      The alternative approach proposed by Fitch of Scotland taking on an “on loan” from the UK only works if Scotland has a rating at least as high as the UK.
      https://www.fitchratings.com/web/en/dynamic/articles/Scottish-Independence-Likely-Neutral-for-Residual-UK.jsp

      Note that Fitch also claimed absurdly that oil revenues being split on a geographical basis is an “extreme outcome”, which suggests that someone has been misleading them as to the true facts and also that they are being too optimistic about rUK(sic)’s credit strength post independence.

      As a final point, it ought to be obvious that e.g. 5% of zero is materially lower than e.g. 3% of £100 billion, which is at least acknowledged by the article.

      But it should be equally clear that, to a lender, provided that it believes Scotland will honour its own debts going forward, £10 billion of debt would be a much better risk than £100 billion.

    32. MajorBloodnok says:

      R whittington says: Unfortunately the issue of Scotland’s future is not a game and people’s lives should not be played with for the sake of anyone’s vanity.

      I know, that Cameron should take this all a bit more seriously and stop trying to write his name in the history books as the ‘man who saved Britain’.

    33. jimsie says:

      Good piece Andrew.As you say the rUK would be forced to play the game. Scotland of course will have a AAA credit rating according to Standard and Poors and the rUK will be hanging on to our coat tails.

    34. Lanarkist says:

      Ivan McKee,

      Mmmmm… Nine of my favourite curries there!

      The only thing not mentioned in Pravda was the amount of each necessary to cover the debt.

      Thinking about the Chinese Emperor story who was asked to pay the mathematician by placing one grain of rice in the first square of a chess board, two in the second, four in the third to the power of 64.

      That is a lot of curry! We would probably be better off just paying the money negotiated as fairly due!

    35. Kenny Campbell says:

      Scotland cannot default what it does not owe. A new Frigate at 3.%% is better than an old one built for a different infrastructure and usage at 2%.

      International Sovereign finance has no soul. It won’t look at poor rUK and say bad Scotland. They will look at income and outgoings, using their risk calculator and the interest will be set at the level set by demand versus supply of bonds/gilts.

      If we choose the pound it will be difficult for us not to get similar rates to rUK. Size of UK sovereign gilts market versus Scotland’s will dwarf us and if lenders see .5% arbitrage they’ll drive up demand for Scottish offer as long as we seem solvent. Its solvency and risk that are measured.


      “The lessons on debt division to be derived from the sovereign debt literature are unequivocal. The repudiation of foreign debt is not a viable option for a country interested in maintaining extensive international economic or diplomatic relations.”

      No debt will be defaulted on, rUK will QE until the GBP is worthless before it defaults. If all bonds are honoured then no default technically happens. This is a complete red herring IMO.

      If we take on the debt then default on payments to rUK then that is a wholly different matter.

      I agree wholeheartedy that an impoverished rUK is bad for us and a ‘dodge’ of the debt will have some level of consumer backlash in rUK.

    36. MajorBloodnok says:

      @RWhittington

      Also, if Cameron and Osborne would stop ‘playing games’ with the issue and just say one way or the other whether a currency union* will happen, then all this uncertainty would go away and livelihoods wouldn’t be at risk. The Scottish Government has made its position completely clear, so why won’t Westminster?

      *(substitute any Project Fear hobby-horse here).

    37. Another Union Dividend says:

      I fail to understand the reverential treatment Darling gets from the MSM / BBC. Yes the last Labour government bailed out the Banks but should have nationalised them so that the taxpayer got its money back.

      However praising Darling is like thanking a speeding driver who ran a red light, almost killing a pedestrian but stopping when asked for help and giving the kiss of life.

      Eor example, in October 2007, barely three weeks after bailing out Northern Rock for £26 billion, the FSA and Alistair Darling signed off their approval for the fatal RBS takeover of ABN Amro without undertaking any due diligence. Incredibly, the FSA overlooked their own rules on capital liquidity by allowing RBS to do the £49bn ABN Amro deal.

      The City of London would not exist had the taxpayers of Britain not paid for the 2008 crash, and it is kept alive by quantitative easing – free money – which boosts inflation for the rest of us. Remember 80% of RBS losses were in incurred in the city of London.

      btw great article on Edinburgh’s financial sector

      http://www.businessforscotland.co.uk/scotlands-financial-sector-will-thrive-after-a-yes-vote/

    38. Kenny Campbell says:

      There are plenty of cards left on Scottish side outside of the cash. Access to Faslane is absolutely vital to rUK. If it is taken away then the Nuclear deterrent won’t last more than a few months.

    39. Xaracen says:

      Are you trying to curry favour, Ivan?
      😀

    40. Greannach says:

      Given the number of times the Labour Party has had to cover for Johann Lamont’s foot in mouth adventures, they must we well used to using “slip of the tongue” when the rest of us would say “nitwit’s blunder”.

    41. Kirsty says:

      R Whittingham

      Personally, using analogies related to games to make a point seems a tad friendlier to me than using those of war or brazenly using invented scare stories, threats or belittling Scots as BT and ConLibLabs are constantly doing.

      Perhaps, you should just consider the actual points raised in this piece instead of worrying unduly about the analogies used to make those points.

    42. NorthBrit says:

      @Kenny Campbell

      I agree.

      And I forgot to include this rather key line from S&P’s criteria:

      “In general, Standard & Poor’s sovereign ratings apply only to debt that the present government acknowledges as its own.”

    43. Illy says:

      You know, paying our share of debt in foodstuffs and electricity could do wonders for public relations:

      We pay our share of the UK’s debt to the people of the rUK, in the form of what they need most: Food and power.

      We could even stick it down as “foreign aid” on the sheets, and we wouldn’t need to worry about all the typical problems with foriegn aid propping up little dictators.

    44. Caroline Corfield says:

      R Whittington – you do understand that the SNP are a majority government elected under proportional representation fufilling a manifesto pledge?

      And that the YES campaign includes other parties?

      Which is more than the Conservatives, elected under FPTP, in a minority government using a coalition partner to abandon anything in their manifesto and pursue an austerity-wipe-the-Welfare-state-off-the-books policy, are.

      Or are you not actually interested in democracy?

    45. jingly jangly says:

      O/T Cameron saying more tax cuts on the way paid for by more cuts!!!!

    46. jingly jangly says:

      That doesn’t make sense what I meant to say more cuts in Public Spending!!!

    47. Lanarkist says:

      Maybe somebody could clear this up for me;

      Many articles and documents make mention of Scotland’s billions paid each year to contribute to UK debt as an ongoing share to service the debt.

      Have we not already paid huge amounts towards the servicing of this debt from our taxes/allowances and our non calculated share of the oil bonanza over the preceding 40 years?

      What is the outstanding debt for? Why are we considered to be responsible for any of it if we are charged annual service charges and contribute the lions share of natural resources?

      This has always confused me!

      Could someone explain it to me in a style that could be understood by a genetically deficient Scot unable to understand these politically complex financial shenanigans.

    48. SquareHaggis says:

      @R Witteringon

      You say potatoes and I say tatties.
      Maybe it’s a langwidge thing.

    49. Doug Daniel says:

      R Whittington:

      Love how you guys like to analogise the debate as a game. If Salmond plays his cards right… Winning hands.. etc Unfortunately the issue of Scotland’s future is not a game and people’s lives should not be played with for the sake of anyone’s vanity.

      We’re talking about post-referendum negotiations here, and it’s fairly standard practice to talk of negotiations in that way. Not happy? Blame the media for decades of shaping negotiation narratives in terms of “who has the upper hand?”, “what’s his trump card?” and “putting on his poker face” and the likes.

    50. TJenny says:

      jingly jangly – been wondering whether at least part of the reasons for WM cutting so much public spending and welfare, other than the fact they’re tories, is in the hope that it wont be so noticeable to the fUK population, that WM are skint, and would have to make these cuts, once we’ve gone?

    51. gordoz says:

      FFS R whittington – who’s vanity ??

      Osbornes ? Cameron’s ?

      Scotlands progress has been restrained with your Union since 1707 but that’s coming to an end, so its all good.

      We’re not playing games, so get used to it.

    52. Angus McLellan says:

      @MochaChoca: You are dead right. Just as “national debt” is only a small part of “liabilities”, so too “divisible assets” are only a small part of “assets”. Assets which might be shared belong to the Treasury, the Foreign Office, the MoD and a few other departments. In cash terms, the majority of the assets that could be shared are financial, followed distantly by defence equipment, with everything else far, far behind.

    53. Doug Daniel says:

      Kenny Campbell:

      A new Frigate at 3.5% is better than an old one built for a different infrastructure and usage at 2%.

      Yeah, I kind of feel this way too. Although I suppose you have to take construction time into account as well – if we need said frigates as soon as possible, then building them from scratch isn’t a good option.

      However, common sense kind of says that Scotland’s not going to be launching any naval attacks in the first few years of independence anyway…

      International Sovereign finance has no soul. It won’t look at poor rUK and say bad Scotland. They will look at income and outgoings, using their risk calculator and the interest will be set at the level set by demand versus supply of bonds/gilts.

      Aye, if international finance had a soul, then Africa wouldn’t be lumbered with so much debt, and the USA would be blacklisted for human rights atrocities throughout the world.

    54. SquareHaggis says:

      @Doug Daniel

      I noticed you mentioned Yes Aberdeen the other day.
      I had a wee wander past Markies on Saturday about 4 o’clock, was hoping to pick up some literature for my local area.
      Any suggestions as to where I might contact them?

      Don’t do twitter even tho I did look there.

    55. Atypical_Scot says:

      Sterling with currency union provides an LOLR and allows iScotland to start with the economy it currently has, ie. a flourishing financial sector.

      Pegging to sterling does not provide a LOLR for the banks.

      Unless there is an LOLR, expect the banks to split their business between Scotland and the rUK, the trading arms will remain south of the border.

      Servicing a per capita debt without the strong banking sector whilst pegging to sterling will be very difficult because economic adaptability is retarded by the strength of sterling itself, which suits only a large financial sector.

      The principle of accepting some UK debt only if a currency union is agreed is as far as I can tell sound.

      The third way would be to accept debt, but use a weaker currency that allowed for competitive exports to revitalise the manufacturing sector. By using a pegged sterling, the only way round this would be a race to the bottom on tax rates or retaining the dismally low minimum wage, keeping the Scottish people down where Westminster policy has put them.

    56. ronnie anderson says:

      @Andrew Leslie, Pravda report, got it in wan, 9 different

      curries,ah wiz thinking aboot what ah would have for

      dinner,anybody fancy a Chicken Curry,made by my own fair

      hand ( nae Mary Berry cook book fur me )yum yum,served up

      with Basmati rice.

    57. Capella says:

      Robin McAlpine at C’mon Scotland has a good analysis of the debt issue. http://www.cmonscotland.org/#!Debt/c112t/39C2D4C6-1629-4E14-8EF9-A69EA307F7E0
      He also suggests that if we pay anything at all, we should pay it to regional authorities in the North of England, Wales, Ireland, Cornwall and the Midlands thus bypassing Westminster where it would simply be syphoned off into tax breaks for the rich.

    58. ronnie anderson says:

      @ Andrew Leslie, well done Andrew good read.

    59. Murray McCallum says:

      Lanarkist

      This government website explains the nature if UK sovereign debt.
      http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts

      Governments borrow money just like companies. They raise money through issuing bonds (= “gilts” in the UK) which other governments, financial institutions and investors buy.

      Gilts have different maturity dates. The holders of bonds get paid interest for the entire life of the gilt.

      At the maturity date, interest payments cease and the government buys back the gilt at the issued redemption price.

      The saving grace (if that is the right term) of the high level of UK government debt is that it is long term, i.e. the average maturity date is about 14 years ahead. The UK faces no short term pressure to issue significant amounts of new gilts.

      I am not an expert on all this but speak as investing is part of a general hobby of mine.

    60. FlimFlamMan says:

      @Lanarkist

      Debt servicing includes interest payments, which don’t eliminate the debt. Government debt is just the accumulated value of government deficits at any given point in time. The UK usually runs a government deficit, so the total tends to grow in absolute terms. Even when added to, it can shrink as a percentage of GDP if the economy is growing faster than the debt.

      So yes, the people of Scotland, and the rest of the UK, have been paying taxes for centuries, and the government has been servicing its debt for centuries. The only way to reduce it, in absolute terms, within existing policies is to run a government surplus. It could also be reduced if the government changed policy and stopped issuing debt at all.

      What’s it all for? Anything and everything; schools, nurses, Trident, wars… the deficit portion of government spending. Some good, some not so good.

    61. Fiona says:

      I can’t make sense of this argument.

      Assets and liabilities have to be considered together, certainly, but we cannot accept that a total money figure is an adequate way to approach this.

      The Whole Government Accounts summary linked above shows total assets as £1268 billion. £745 billion of that is in the form of physical assets like land and property and roads, which are located in one country or the other. Such things have not necessarily been fairly divided, because a great deal of infrastructure spend is in London: but no matter. All of that sum will stay where it is and we can assume for the purposes of the calculation that they represent the value derived from each country’s contribution to date. So they should not enter this calculation at all.

      That leaves £514 billion which is money owed to the UK from trade as well as bank deposits and some miscellaneous stuff which is unspecified. At around a 10% share of that we get £51 billion and that is a far cry from the £129 billion mentioned in the business for Scotland analysis, also linked above. Their figure is obviously around 10% of the total assets without any consideration of that split. So our real share of any asset split will be £51 billion only. But it won’t. That £514 billion is more than offset by what is owed on the same account which the WGA put at £641 billion. So what Scotland would actually get from a division of assets would be Minus 12.7 billion if we base on 10%.

      On the liabilities side the total owed is £2615 billion, and, as already noted by a different poster upthread, £966 billion of that is debt. A 10% share is £96 billion, but the Business for Scotland paper estimates that Scotland will gain £80 billion immediately if it is not responsible for that debt: so let us go with that figure.

      There is a complication because the debt share is capital but the payment is not: we service the interest on that debt, and perhaps pay some of it down as well if all goes well: so the immediate £80 billion is not a sum of money Scotland would get but a sum of money it would not pay out; which is not quite the same thing. ( I am guessing it is that difference which accounts for the disparity in the figures, but I may be wrong).

      The crucial point is that if we accept a share of that debt without a currency union that £80 billion must be paid in sterling. We cannot get sterling except from a trade surplus or from borrowing: And if sterling increases in value from its current parlous state we will find that the cost of servicing that debt will rise in line with that revaluation.

      Say that Scotland is not in a currency union and it has to pay the debt interest in sterling. The No campaign point out that much of our foreign trade is with the UK, so let us suppose that the trade balance is healthy and we have net exports to the rUK to the value of £100 billion. £80 billion of that export income must be used to service the debt, and we have a surplus of £20 billion which we use for domestic purposes because we are using sterling as a tradeable currency, let us suppose. In the rest of the economy we are also successful and so the other 40% of our foreign trade net income is received in other currencies which we can use to buy sterling ( or insist on receiving in sterling)to make up the shortfall of domestic currency need. Let us imagine that the total requirement for sterling is £30 billion over and above the amount needed to service the debt. At the end of year one, if rUK trade is 60% of the total foreign trade we have 57 billion in a foreign trade reserve if we do not spend any more of the income, but rather save it all. So we have earned 167 billion and had the benefit of 30 billion and we have also saved 57 billion

      In year two the rUK economy goes further into recession and so they cannot buy £100 billion worth of goods from us: they only buy £80 billion worth. Now all of the income from our trade with the UK goes to service the debt. We still need 30 billion sterling for domestic use and so the remaining 40% of export income is committed to that extent: we must be paid in sterling or we must buy sterling with the other currency we hold or earn: and our capacity to build up a foreign currency reserve is reduced. At the end of that year we have earned 147 billion: used 30 billion for domestic requirements; paid the 80 billion in sterling to service the debt: and the foreign exchange reserve has increased by 37 billion. And on it goes

      In year three they again reduce their purchases by £20 billion. So we get £60 billion in sterling and we still need the same £30+ £80 billion: and we must get the shortfall from our reserves or other foreign exports as before.

      Of course we might be able to make up the shortfall by successfully exporting elsewhere: but do you count on that kind of adjustment in a short space of time? In a global recession? With the possibility that in any one of those years the oil price might fall temporarily? I don’t.

      Then imagine that the rUK economy improves in year four and they are now in a position to buy more from us again. The fact that their economy has improved has attracted the attention of the confidence fairy and sterling has increased in value (not at all unlikely given the parlous state of the £ at present). So they buy £100 billion worth of goods again and all is rosy. Except they won’t of course: for sterling is worth more so it follows that it is cheaper for them to buy from a country which has seen a relative decline in the value of their currency vis a vis sterling: and since we use sterling at this point that is not us. So they still buy £60 billion worth from Scotland and that is our sterling income. We still need to make up the shortfall, but if we ask other countries to pay in sterling we get less from them for the same quantity of goods because sterling is worth more: and if they pay in another currency we must buy sterling – which costs more. But still we must pay £80 billion pounds

      No matter which way I look at it I cannot see that accepting a share of the debt is not the worst of all possible options, unless we have currency union.

      As to lenders taking the strunts because they perceive we have reneged on a debt: perhaps. I think they are interested in getting paid and that is related to the underlying strength of the real economy; so that is unlikely: but I think that they will not see how they will be paid if we do take a share of sterling debt

      So far as frigates are concerned: building them here is not a simple matter in the way the op suggests either. Perhaps a debt to the UK would be cheaper or perhaps not: but that is not all that is in play because if we take on a more expensive debt (assuming we want a frigate) and build it here then some of the income generated through wages leads to improved GDP and more money in circulation: and that is a virtuous cycle for the people in the real world. It emphatically does NOT “make[s] more sense than having to borrow to build one from scratch”

    62. Muscleguy says:

      @Cath
      Currently a number of warheads are stored in bunkers at RNAD Coulport on Loch Long which is also where the warheads are removed from the subs and put back on again.

      Bunkers don’t take that long to build in reality and Aldermaston where the warheads are serviced can already store quite a number. So when it comes down to it, they can build enough new bunkers in 2 years to hold all the warheads. Then the subs can go to Devonport or Barrow and the missiles returned to the common US pool which is where they come from.

      Then there is taking the bases apart cleanly and safely and decomissioning them. I see on Google Earth that the footprint of the US Navy’s old Polaris base on Holy Loch is still there, still unused. We should insist they return all above ground areas to safe use. But that can be handled after the warheads, missiles and subs are gone.

      There is NOWHERE else to put them and the timescales and public inquiries and compulsory purchase order judicial reviews for a de novo facility are decades. So they have no choice but to put the warheads on ice in the interim. We know they can do this as they are currently stored safely, so they say, at both Coulport and Aldermaston.

      Bunkers, that is all they have to build. They can repurpose them as cruise missile warheads as the LibDems have proposed but that will not be our concern.

    63. Murray McCallum says:

      I agree the theme of Andrew’s article – Scotland should give a commitment to cover a fair portion of the UK debt.

      However, from a legal and financial perspective, I do not believe the Scottish Government should undertake to have ANY of this debt formally reassigned in Scotland’s name.

      An independent Scotland should be debt free.

      The Scottish Government should negotiate its commitment to this historic UK debt by means of an agreed fixed interest payment over a fixed number of years.

      A far cleaner and fairer “divorce” in my view.

    64. FlimFlamMan says:

      @TJenny

      WM are not skint, and they won’t be skint after independence either, unless they agree to a currency union. They’re cutting because they’re Tories.

      Which leads me to this from the article:

      So why has the UK government done something different, and so apparently obviously not in its interest?

      There can be only one rational answer: so fragile is the UK’s creditworthiness that any uncertainty at all about how its external debt would be split and serviced after Scottish independence might have put pressure on its cost of borrowing.

      How can uncertainty about the level of post-independence debt be worse than declaring that WM will take responsibility for 100% of it? Does uncertainty magically make it more than 100%?

    65. Lanarkist says:

      Murray/FFM thank you both very much. I sort of intuitively understood this, on a good day, but having it explained and in a document I can refer to will help keep me straight.

      Having in depth discussions on FB with solid No working in insurance in London who is trying to wear me down with concentrating his argument only on finance.

      Democracy, national pride, soul, spirit have no monetary meaning for him and so don’t exist in any meaningful way.

      Many thanks.

    66. Chris says:

      A fair proportion of the debt with a currency union will be a greater value than a fair proportion of the debt without a currency union. What is fair and reasonable depends on the rest of the bargain!

    67. Clootie says:

      I’m sorry Andrew. One side (Gideon)started the hardball tactics.
      If the retain all assets then they retain all debt.

      I would be happy to accept a fair allocation of both. I would be happy to give an assurance that we would not “sell” our share of the $350billion of bonds purchased via quantatative easing in one lump but stagger over several years.

      However the debt includes aircraft carriers / Astute class submarines / and a thousand other hard assets. No offset – no deal.

    68. Bigdrone says:

      To Atypical_Scot

      Is it possible for me to copy your post to League of VSS please? Part of the discussion on it was on currency and I asked the question if there was a currency union outside a formal agreement (pegged to Sterling) then who would be the LOLR.

      I take it from your post there would not be one. Is this correct? Thanks

    69. Atypical_Scot says:

      @Bigdrone;

      Copy away:-P UK LOLR is the BoE. iScotland with a pegged sterling would require a central bank, with collateral, which hasn’t been presented as immediately possible so far.

    70. Xaracen says:

      “£80 billion of that export income must be used to service the debt, and we have a surplus of £20 billion”

      Fiona, if iScotland took on £80bn of the UK’s debt, that £80bn does not need paid every year, iScotland would only need to pay the interest on that, say, 2% to choose an easy figure to calculate with. That would equate to £1.6bn per year, plus some extra if we wish to pay down some of the capital. If we paid a full £80bn in one year the debt would be almost eliminated, with just traces of interest left.

    71. Grouse Beater says:

      Who in their right mind would want to buy a second-hand frigate from the rUK mainly because it’s offered at a lower than average interest rate?

      It’ll arrive minus guns and navigation equipment, piloted by an aged Cornwall fisherman expecting to be paid!

    72. Murray McCallum says:

      Regards second hand RN equipment, remember what happened to the Canadians. Whatever the argument over fault, Geoff Hoon’s comments were atrocious:

      “He [Hoon] accompanied his condolences for Saunders with a proposal that the Royal Navy would charge Canada for the cost of the rescue while also stating that Canada as the buyer had to beware.”

      http://en.wikipedia.org/wiki/HMCS_Chicoutimi_(SSK_879)

    73. Bill Walters says:

      “There can be only one rational answer: so fragile is the UK’s creditworthiness that any uncertainty at all about how its external debt would be split and serviced after Scottish independence might have put pressure on its cost of borrowing. Any rise in that cost and the UK’s debt burden would look even more unsustainable than it already does, leading to a further rise, and so on, into a Greek-style economic death spiral.”

      On this point, I think we have to say that governments always have an incentive to avoid instability that could influence the bond markets. Even if your economy is booming you want to have access to capital markets at the lowest cost possible. The UK guaranteeing the debt makes complete sense at the best of times, but that’s particularly the case given 1) they probably don’t believe we’re actually going to vote Yes anyway and 2) they certainly don’t believe for an instant that we’re going to avoid taking on our share of the debt.

      It’s basically balancing actual issues we have to deal with (the current cost of servicing our debt) against a fictional future scenario that has next to no chance of actually happening (i.e. an independent Scotland refusing to take on its share of the debt).

    74. a Supporter says:

      Maybe we won’t walk away from contributing to the cost of the debt. But for Chrissakes keep them guessing. Stop putting forward reasons why we shouldn’t beforehand which reduces our negotiating position. Far too many YES supporters are far too willing to be ‘nice’ to those bastards.

    75. Dan Watt says:

      If Russia can pay the debts of the former USSR in 9 different Curries, surely we can create an equally hilarious method of payment to the fUK!

    76. call me dave says:

      Hi two potentially good stories appeared in Herald at about 6pm.

      Cant Archive them any more (don’t work). 🙁

      1.
      Professor David Simpson: currency union would benefit rUK more than iScotland

      A currency union would benefit the remainder of the UK more than an independent Scotland, according to a veteran economist.

      It would actually be in Scotland’s greater self-interest to use the pound unilaterally but a currency union would benefit both sides of the border, Professor David Simpson said.

      2.
      The economic outlook for an independent Scotland looks better than previously forecast provided it continues with the UK Chancellor’s spending squeeze, according to economists.

      The Institute for Fiscal Studies (IFS) has issued “good news” for an independent Scotland compared with its more cautious forecast last year, but said it must continue with the spending cuts which have been unpopular with the present Scottish Government.

      PS:
      How the FM getting on in London?

    77. EphemeralDeception says:

      @Lanarkist and others.

      Some additional points:
      The Scottish government has already stated that any debt share will be negotiated and this is going to take into account the balance of payments between Scotland and the UK over the last 40 years (where records are available). This will reduce Scotland’s debt share based on a starting point of simple population ratio.

      Then there is whole host of other geopolitical horse trading based on share of Assets and each states interests.

      On the whole I cannot see Scotland coming away with a higher debt burden than we ‘enjoy’ as part of the UK.

      Risk. No matter the outcome risk will be part of our credit rating. One part of this risk is track record. Scotland is not starting from zero. The Scottish Government now has a good track record of managing its budget and balancing the books and also delivering projects as planned.

      LOLR: maybe I am mistaken but the International lender of last resort is the IMF and the UK had to go to the IMF after Sterling lost value so the bofE was not much use. So a currency Union is as strong or as fragile for Scotland as the base it sits on.

      Personally I like the idea of a currency union initially if wee keep Sterling. Internationally it keeps monetary things pretty bound up as they currently are as one common trading area and one currency. Scotland will start to emerge as a distinct entity with its own strengths and weaknesses internationally and can take time to develop the right policy.

      Final comment just for laughs: UK will keep its name because that way it gets to keep its seat in place next to the US (alphabetically) at the big events 🙂

    78. call me dave says:

      From Scotsman.

      Scotland in a better position than previously thought.

      http://archive.is/n6wf6

      http://archive.is/JoXlX

    79. The Rough Bounds says:

      @a Supporter.

      Exactly!

    80. kininvie says:

      @ephemeral deception

      UK will keep its name because that way it gets to keep its seat in place next to the US (alphabetically) at the big events

      I’ve long been in favour of renaming ourselves the ‘United People of Scotland’s Kingdom’ for that very reason. Think of their faces at the UN, Nato etc. etc.

    81. X_Sticks says:

      R whittington says:

      “Unfortunately the issue of Scotland’s future is not a game and people’s lives should not be played with for the sake of anyone’s vanity.”

      So you think it is acceptable that child poverty in some areas of Scotland is OVER 50% while the vanity of westminster and it’s millionaires trundles on. Wake the fuck UP or get the fuck OUT!

      Sorry Andrew, well considered article. Apologies to any one I’ve shocked, but I’m really starting to lose it with these FUD idiots.

    82. Ronnie says:

      @Square Haggis

      Sorry you missed us, you can find us here;

      https://www.facebook.com/YesScotlandAberdeen

    83. John says:

      @xaracen

      I think the crux of what @fiona is getting at is a worry that an iscotland would agree to pay a popln share of UK debt to UK in sterling without a formal currency union. (Albeit debt legally remains with ruk.)

      From the little I understand about this, I cannot see any advantage for Scotland in this compared with having control over our own currency and no debt.

      Why would we risk an informal currency union with debt? It looks to me like that’s the worst option.

      Could anyone with knowledge about this explain to me in laymans terms, the benefits and disbenefits of the main currency options please?

      A simple comparative example would be ideal. Thanks folks j.

    84. wee162 says:

      If we don’t build a frigate and instead inherit one then we don’t get the economic benefit of the wages people would get recirculating in the economy, or the profits firms make on building them.

      Consider taxation for example. A shipbuilder would be paying tax on their income. They would also be paying vat on stuff they buy. That money they spend ends up with other business owners and their staff. Who also pay tax.

      Anything we want that can be built ourselves should be so. By all means take the value of the UK assets off the debt, but it would be economic insanity to take assets which can stimulate growth in the economy.

    85. Morag says:

      Andrew’s point 3 is what has been worrying me. If we don’t have a currency union, England+ is in serious trouble, and so the pound is in serious trouble. And if we then decide to peg our currency to sterling, it seems to me we’re in trouble too. I don’t really like the sound of that.

    86. You and My Comb says:

      O/T I wonder if anyone has seen the Guardian today. They appear to be doing a series on Scotland finances. Today they are dealing with debt. I haven’t had time to look fully but they are talking about £81bn debt and 14-19.3bn net borrowing. They are still talking about a ‘per capita’ share of North Sea oil although they also give a geographical share option.

      As far as debt is concerned,they appear to have relied on some FT figures and suggest our rating would suffer.

      I don’t have time to look at all of it but wondered if anyone here has thoughts. Also are any of you contributing to the discussion? I don’t buy the rag anymore and thought that some of you will still be soldiering on

    87. kininvie says:

      @wee162

      What you say makes sense in general. But of course the frigate was only an example I picked at random of the thousand and one things we would need in a hurry if we were starting from scratch with no inherited assets.

      By and large we would have to buy them, and we’d likely have to borrow to do so.

      So it all boils down to how we get the best deal. My guess is that the best deal will be if we haggle with rUK over assets/liabilities rather than with a raft of international lenders….but I could of course be wrong

    88. dadsarmy says:

      @Andrew Leslie
      I’m going to take you up on one thing Andrew: “To put it simply: if we can inherit a frigate from rUK”. Why?

      This is purely about the defence angle, and anyone who remembers my postings elesewhere for 2 years will know I’ve described myself as a “hawk” in matters of defence and would probably happily spend an annual budget of £10 billion, counting all my toys and gurgling happily.

      But why, to start with do we need anything, apart from some sort of army to keep civil peace if neccessary, and act in case of humanitarian need in our own borders. We have 3 FPVs (Fishery Protection Vessels), and some other naval and air assets. All we absolutely need to do is patrol our own waters and airspace for smugglers, drug-runners and fish-stealers, and that’s it. A couple of mounted machine guns would do that job and quick training. Add a couple of OPVs (O for Offshore) at a cost of £50 million each tops including training, a couple of dual purpose Sea Kings and we’re all laughing.

      If Scotland is threatened, so is the rUK and NATO space. They would have no option but to continue underwater surveillance and protection, running air interception, and heading off the invading armadas of forces unknown.

      We can build in our own time, others have.

    89. SquareHaggis says:

      @Ronnie, thanks for the link.

      Really need to get something thru the doors this neck o the woods (south aberdeenshire) folk seem to walk around like heidless chickens when you speak about the referendum.

      Is there someone there every Sat and can I take a few handfuls of papers away with me?

      Will aim for late mornin to mid affy.

    90. FlimFlamMan says:

      @Morag

      A currency union would put England+ into serious trouble. The thing that this and other articles, and mainstream economists in general, miss or ignore is the relationship between the currency and the external balance.

      Economies with an external deficit can bobble along during periods of growth, but their inherent vulnerability is exposed with any sort of shock or downturn. That external deficit has to be funded, and if a nation does not have its own currency it can lose the ability to fund it, resulting in a rapid downward spiral.

      The UK, with its own currency, has not suffered nearly as much as the Eurozone ‘periphery’. That’s because it has been able to finance its external deficit, where the Euro countries lost that ability. The ECB is keeping them, afloat, but barely.

    91. kininvie says:

      @dadsarmy

      As you’ll see from my reply to Wee 162 above your comment, I took a frigate as an entirely top-of-the-head example of one of the many things we are going to need. Some in more of a hurry than others, true… I defer to your expertise.

      But all kinds of things collude & have consequences. I’d ask you: if we decide we want to join NATO, how’s it going to look if we have to say ‘we can’t contribute a thing at the moment, but hang on for five years and we’ll have something’

      I suppose I’d sum it up that if we wish to be taken seriously as an independent nation, we have to hit the ground running in all kinds of fields – diplomatic, military, the UN, the EU and so on. It’s going to cost:

      So we either borrow or inherit. That’s the choice.

    92. dadsarmy says:

      Just reading comments. The irony is of course that Scotland can’t actually take on any debt without the agreement of – the rUK. Unless we want to just post some stuffed brown envelopes to Whitehall and hope they know what to do with them.

    93. dadsarmy says:

      @kininvie

      Sensibly yes we need some basic starters, but we can get them ourselves. I suspect the total inventory is a lot smaller than we need, and then there is according to the unratified debt/successor, a requirement on the continuing state to set the new state off viably, and provide all relevant archives (whatever that means!).

      My take is that if the rUK plays hardball after the YES, then Scotlandjust does the same, lock stock and barrel. We would have no choice, and if some sort of international artbitration was observing, then in that case there would be no abd reputation for Scotland.

      I think the first stage is all is up for negotiation or none of it. If negotiation isn’t agreed then it’s the secondary one of accepting rUK continuing status, no assets, no debts, but some things then can be neogiotated, like a 10 year grace period for the rUK to remove its property and assets at Faslane. Worth a few bob in terms of some assets back, I think.

      I totally agree with the last paragraph. Salmond must stand firm.

    94. dadsarmy says:

      Just to add that it’s a totally different ball game with negotiations starting from the continuator UK status. It starts upwards from zero assets and debts, and is voluntary for both sides, with Scotland very much having the upper hand. So for instance Scotland says “OK, we’ll start with taking £10 billion of debt, now what will we take for that in assets? OK, another £20 bilion in the pot, we’ll have some of these and some of those”.

    95. kininvie says:

      @dadsarmy

      Just to add that it’s a totally different ball game with negotiations starting from the continuator UK status. It starts upwards from zero assets and debts, and is voluntary for both sides,

      That’s about the sum of it. The first UK govt ‘Scotland extinguished’ analysis paper was positively obsessive about the rUK’s right to be continuator. But that has consequences: Since the UK has assumed responsibility for the debt, it is up to Scotland to negotiate if/how much it agrees to pay its share of, and in exchange for what.

      My argument was only that it was likely to be in Scotland’s interests to negotiate, for the reasons I gave, rather than to stick up two fingers and walk away.

    96. FlimFlamMan says:

      @John

      It seems there are five options being discussed, so here are my thoughts on the main points, as someone obsessed concerned with sectoral balances.

      Option 1: Formal currency union

      Advantages in trade due to the currency being shared with largest trading partner and resulting reduced transaction costs. Psychological advantage due to reduced change as part of transition.

      Huge disadvantage for the nation with an external deficit, rUK, due to vulnerability of ability to finance said deficit.

      Two examples. Germany does fine in the Euro currency union because it runs external surpluses. Spain, in the same union, is suffering Great Depression levels of contraction and unemployment because of its external deficits.

      Option 2: Using sterling without ‘permission’

      Essentially the same trade and psychological advantages.

      Possible disadvantage: the ‘banana republic’ appearance of using another nation’s currency; comparisons with Montenegro etc. No external deficit problem for rUK, since rUK would continue to control and issue sterling.

      One example. Ecuador uses the US Dollar, and does more or less okay thanks to oil exports.

      Option 3: Scottish currency pegged to sterling

      Trade advantages reduced to the fact that the numbers would be the same, so no calculating exchange rates. The peg would be with Scotland’s largest trading partner.

      Is having to set up a new currency, and its associated institutions, a disadvantage? It’s something other nations seem to manage, including several that are significantly smaller than Scotland.

      Two examples. China successfully pegs to the US Dollar; it runs consistent external surpluses. Argentina tried pegging to the US Dollar despite external deficits; its economy crashed and it was forced to end the peg.

      Option 4: Scottish currency pegged to Euro or some other

      Similar advantages and disadvantages to option 3, except local prices would change, and peg would be with the second largest trading partner. Actually is the Eurozone Scotland’s second largest partner? It’s a reduced advantage in any case.

      All these first four options share one feature; they depend on Scotland running external surpluses in order to work. The bad examples are all nations which entered similar arrangements, but ran, or found themselves running, external deficits. In addition, the first option depends on rUK agreeing to a union which would damage their economy.

      Option 5: Scottish currency, floating exchange rate

      Advantages in being able to respond to downturns and shocks with government spending, in not being beholden to bond markets, and in not having to run an external surplus. All due to being the issuer of the currency and not a mere user, with no promises to convert.

      Disadvantages? Again it’s the psychological factor and the ‘burden’ of setting up the institutions.

      One example. Australia, not a large economy, but with its own floating currency, was able to respond to the 2008 crash with relatively large government spending, and resulting government deficit. As a consequence they didn’t even enter recession.

      Sadly, the Australian government later reduced spending too quickly, and now their new right wing government is making things worse. Bad politics leads to bad economic outcomes.

    97. dadsarmy says:

      Oh yes, Scotland has to negotiate in “Good Faith”, towards an equitable solution. What Scotland really has going for it is the White Paper which shows exactly that, whereas what the UK has going for it is White Papers and Osborne going global, literally, to show the UK isn’t prepared to negotiate in good faith.

      Osborne attracted a lot of attention and now every economist and legal person in the world (slight exaggeration) seems to be interested. And that is all Scotland needs to get past the pro-union media, and to get ultimate international acceptance.

    98. David Halley says:

      1) If we get a share of the assets. How can we use them or divest them. An 8.4% minority shareholder has no power
      2) A formal currency union is a disaster without a debt union, which means the debt is shared now and in future. This is not what we are looking for from independence. We do not want to still be tied to the UK economy rules. The Euro is a disaster because of this. Just ask the 50% unemployed youth in South Europe.

      Too many unqualified economists in this argument. Without real world investing experience you cannot understand the flows in the international markets, which is why politicians and academics are ultimately useless, yes, that includes Alex Salmond.

      The market will have a very short memory of a Scottish ‘default’, it is a forward looking mechanism. There will be demand from the East if the West don’t want it.

      Standard Life’s issue and pension funds & insurance companies, is that they are loaded with gilts and this could cause a large mark to market loss.

    99. Seasick Dave says:

      Without real world investing experience you cannot understand the flows in the international markets.

      We all saw where that investing experience got us.

    100. peter says:

      Steady steady, wait wait, not yet, wait till you see the White’s of there eyes, all we need to do is keep our nerve. And as for Alistair Darling, once this battle is over and we wipe the floor with them, he and all the rest of the Labour rat ("Tractor" - Ed)s, are done for, in a new and free Scotland, We will never forget or forgive there treacherous behaviour.

    101. dadsarmy says:

      @FlimFlamMan
      Ond disadvatage I could see for the rUK of sterlingisation is if Scotland’s economy does stride ahead and drag the pound with it, albeit at 1/9th (rising) of the GDP.

      So for instance if Scotland’s economy rises 2%, it’s negligible but if 10% then it adds 1% overall support to the £ and perhaps a 1% over-valuation. That’s not a lot but it still means a slight downwards effect on exports for the rUK and increas on imports for them. Taht is of course a problem even now, but our economy is being kept down at the expense of the UK and London, as is the rest of the UK economy (e.g. North England).

      An example of course of devaluing a currency is China accidentally letting their currency drop with the unfortunate effect of making their exports cheaper and imports more expensive!

    102. FlimFlamMan says:

      @David Halley

      In essence, currency unions only work when not only currency issuance and monetary policy are united, but also fiscal policy — both spending and taxation — and debt issuance. That level of unified control/power needs democratic accountability. What you end up looks an awful lot like a nation state.

      @dadsarmy

      Yep, politicians have a fetish for a ‘strong’ currency, which hurts exports and encourages imports. That would be fine if they spent high enough and/or taxed low enough to enable full employment anyway. But they don’t, so manufacturing suffers and millions remain unable to find work.

      Precise numbers are impossible to project, but a strong oil based Scottish economy within a sterling area — official or not — could be expected to hold sterling higher in value. If WM continues with the policies of the last several years, and different governments, then manufacturing will continue to be sacrificed in favour of international finance.

      So yes, an overvalued pound is probably already a problem, and the combination of a strong Scottish economy and bad WM policies could make it worse. To be clear though, I’d place the blame squarely on WM’s policies.

      There are other advantages and disadvantages I could have listed, but I was trying to limit it to the big ones, and in particular the one that is almost always ignored: the sectoral balances and how an external deficit is financed.

    103. Southerner says:

      @fiona, you should submit your response for a PhD, one small point, I have read it a number of times and do not quite understand why you pay £80bn every year to the UK. Are you taking the whole debt interest responsibility as opposed to none advocated elsewhere?

      An independent Scottish pound must have political attractions as Scotland can control her own destiny and peg or not peg as she chooses. With a petroleum based currency though the manufacturing sector maybe hard hit by a high currency strength.

      It is not clear to me why AS is sticking to a pound union as the point of independence surely is to move away from rUKs financial control. The BoE seems to be setting the rules on the currency debate and not the politicians so not sure why the thought is they will change their view.

    104. dadsarmy says:

      @
      A quick lazy google gives me 1£ = 1.22 Euro right now. It’s been around there for a time, but a problem is I think that the pound is seen as a safe haven for euro problems, and that means it goes up or down with that. I’d prefer it at around 1.12, that gives tourists to Scotland near 10% more for their money coming over. With corresponding advantages for exports.

      It’s an argument for our own currency as they say in the medium to long-term, with an already noted danger of a rising value if floated.

    105. dadsarmy says:

      That was for @FlimFlamMan !

    106. FlimFlamMan says:

      @Southerner

      I think fiona may have mixed up stocks and flows. The important thing is that while [r]UK debt will continue changing, most likely growing, Scotland’s share of that debt, if any, will be fixed at the moment of independence. After that point Sotland may issue its own debt, but it won’t take any further share of rUK debt.

      If the agreed share of the debt comes out at £80 billion, taking fiona’s number, then the annual payments to WM might look something like this:

      Lets say the agreement is for payment over 25 years, and the £80 billion is effectively made up of 25 year bonds with a 3% coupon. I’m not going to work out the actual effective aggregate coupon on outstanding UK debt, but 3% is reasonable. That’s a total payment of £140 billion; £5.6 billion per year.

      This is in addition to whatever debt Scotland issues on its own behalf after independence.

      fiona is absolutely right about the dangers of debt that is denominated in a foreign currency; any currency the debt issuer does not control. It’s a huge part of why the Euro is such a disaster.

      With a petroleum based currency though the manufacturing sector maybe hard hit by a high currency strength.

      If a nation’s currency is too high in value it’s very easy to lower it; just create more and use it to buy foreign currency. Switzerland has been doing this over the last few years to keep the Franc from rising.

      The key is in electing governments that will support the interests of the entire nation, including broad based manufacturing. Not just favouring finance and/or oil.

      @dadsarmy

      Well the Euro is definitely overvalued, given the state of the Eurozone economy. This is part of their continuing problems, though not nearly the most important factor. And again it comes down to the fetish for a strong currency, and general political nuttiness. The ECB could reduce the value of the Euro in the same way that Switzerland keeps the Franc down, but that might make it look like the Euro was being ‘backed’ by the foreign currency purchases. It wouldn’t actually be backed by them, but politicians and economists don’t seem to want even the appearance.

      The ECB could do lots of other things as well; the continuing appalling situation in southern Europe is entirely the result of the structure of the Euro.



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