“Introducing a new Scottish currency has always been the most sensible option….”

Okay, so let’s for argument’s sake assume the premise of my previous blog is roughly true. Why is Alex Salmond want to mash up the media playing field between now and Thursday. It’s the conclusion from a short paper by Angus Armstrong and Monique Ebell of the National Institute of Economic and Social Research (NIESR), called simply, Is This Plan B:

In 2016, Scotland is likely to face twin deficits in the year that it might become an independent nation. These deficits are substantial: a fiscal deficit of over 6% of GDP and an external deficit, although difficult very to judge, may be similar in magnitude. This includes a geographic share of North Sea oil and gas reserves.

An independent Scotland would inherit perhaps £7bn of foreign exchange reserves. Claims that there are other financial assets, specifically quantitative easing assets, to be shared miss the fact that these are fully funded by financial liabilities.

We estimate that an independent Scotland is likely to inherit between £140bn and £120bn of the existing UK debt. Even assuming 5% repayment per year, an independent Scotland would face a funding requirement of at least £17bn in the first year. ‘Sterlingisation’ is likely to be vulnerable to even a modest negative shock.

If the Scottish Government combines ‘Sterlingisation’ with reneging on its fair share of UK debt, which judging from the First Minister’s comments may be Plan B, this would increase rather than reduce the fragility of the currency arrangement. The ‘appeal’ of this option might be that it reduces the internal and external funding requirements.

However, this would be a false economy. International investors are likely to see walking away from debt as ‘opportunistic’ and either charge very high borrowing premiums or exclude Scotland from international markets. This would imply an immediate return to a fiscal surplus and therefore unprecedented austerity.

Entry into the EU would be out of the UK’s hands, even if it supported Scotland’s case. This would raise doubts about the outlook for
exports, particularly for financial services. Whether the citizens of Scotland would accept this policy simply to hold onto sterling would become a source of speculation with a low level of reserves as defence. We would expect the currency arrangement to fail and Scotland would be forced to introduce its own new currency within one year.

Introducing a new Scottish currency has always been the most sensible option. We would recommend this is carried out before losing £7bn of foreign exchange reserves rather than after.

I suspect, in fact, that there was no Plan B when the White Paper was written, since it could mean ditching the banks. At 1200% of GDP it’s not sustainable in the long term without someone else holding the credit note to pay their liabilities (the idea that you can do that and get away with it disappeared in Ireland in Circa 2008).

Chris Cooke also thinks an independent Scottish pound is the way to go, and in the long run a better deal for the banks too…

In an age of direct instant connections there is no longer any need for banks as middlemen to intermediate credit risk, although there is a need for risk management or banking as a service.

The irony is that far from resisting such a transition to service provision, it is entirely in the interests of current banks to make the transition, because as a service provider the only finance capital they need is that necessary to cover operating costs, and the human and intellectual capital necessary to provide the best possible service.

So Scotland’s monetary system of credit creation, exchange, clearing and investment does not require a currency at all – virtual or otherwise – from the Bank of England. £ denominated paper notes may continue to be issued by Scotland’s banks precisely as now, except that they could be backed by Scottish Treasury Giants and Titans which would simply be undated Treasury prepay credit notes again denominated in £.

My (totally amateurish) guess is that it’s been framed the way it has because: one, sticking with the BOE means least possible disruption (and therefore easier to get over the line with voters); or two they ran out of time to finish the work on a more radical option).

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  • Ernekid

    The Irish Free State had a a currency union until 1928 and then for years after wards had a de facto currency union as old British coins and the new Iirsh coins were used interchangeably. Once again looking at Irish history gives answers to Scotlands future

  • dougthedug

    From the White Paper:

    Scotland’s fiscal deficit is forecast to have fallen to between 2.5 per cent and 3.2 per cent of GDP

    The SNP Governement didn’t think up a currency union on the back of a fag-packet. They got a fiscal commission together and asked them what the best option was. They recommended a currency union. It comes down to which financial experts you believe.

    International investors are likely to see walking away from debt as ‘opportunistic’ and either charge very high borrowing premiums or exclude Scotland from international markets.

    A very odd statement. Scotland has no debt and even if it took on a “share” of debt it would just be paying the rUK not international investors for debt already held which the UK has guaranteed. No international investor would lose anything if Scotland refused to pay off a share of the UK’s debt. Scotland can’t walk a way from debt it doesn’t owe.

    If international markets saw Scotland take on the payment of debt with no quid pro quo of assets from the rUK or simply rolling over and accepting a share of the debt under duress they would regard it as weak and not well governed, in other words a risk.

  • Reader

    dougthedug: They got a fiscal commission together and asked them what the best option was. They recommended a currency union. It comes down to which financial experts you believe.
    They forgot that it takes two parties to make a contract. The interests of iScotland and rUK are not identical. Your best (only) hope is horse trading, and you may not like the price.

  • Neil

    Your best (only) hope is horse trading, and you may not like the price.
    They’re not the only ones. 10% of the 1.3 trillion of debt may well be the price for rUK.

  • mickfealty

    Read the piece Neil. It means running a fiscal surplus and all bets are off…

  • dougthedug

    Only if the Scottish Government can’t borrow and as I said, all the debt is the UK’s and the UK has guaranteed it.

    No international investor will lose out if debt and asset negotiations between the rUK and Scotland break down.

  • barnshee

    “Once again looking at Irish history gives answers to Scotlands future”

    Ah I see— partition -where will the border be?

  • Neil

    International investors are likely to see walking away from debt as ‘opportunistic’ and either charge very high borrowing premiums or exclude Scotland from international markets.

    “Walking away from debt”, is that a new term? Something akin to defaulting on debt you don’t have? Sounds suspiciously like nonsense. Can you provide an example of a country “walking away from debt” and the subsequent fallout?

    I then wonder, as one must with all reports on these subjects, whether the think tank has a dog in this fight too.

    The National Institute of Economic and Social Research (NIESR) is an independent research organisation located in the City of Westminster, London

    Well, I can’t draw too many conclusions from that I suppose. OK they’re based in the City, but that doesn’t mean they’re biased.

    Dr. Martin Weale, CBE, was the Institute Director from 1995. The current Director is Jonathan Portes. Lord Burns has been President since 2003.

    Again, no reason to draw any suspicions there, I’m sure many “lords” and ‘CBEs” are very independent and fair in their analysis.

    Dr. Martin R. Weale CBE (born 1955) is a British economist. On 5 July 2010 it was announced that he would join the Bank of England’s Monetary Policy Committee
    A Commander of the British Empire and BoE MPC member no less.
    Terence (Terry) Burns, Baron Burns, GCB (born 13 March 1944, Hetton-le-Hole, County Durham) is a British economist, made a life peer in 1998 for his services as former Chief Economic Advisor and Permanent Secretary to HM Treasury

    The treasury you say? Oh dear.

    He was knighted in 1983, received the Knight Grand Cross of the Order of the Bath (GCB) in 1995, and was made a life peer as Baron Burns, of Pitshanger in the London Borough of Ealing, on 13 June 1998.

    Now it begins to sound like this think tank, based in the city, led by a CBE/BoE MPC member and formerly a Lord and Baron/former permanent secretary to the treasury may be towing the establishment line, of which the Director is a fully paid up member for life.

    Sorry, no sale. I don’t believe the markets will freeze Scotland out for not defaulting on debt it doesn’t owe. The markets know a money spinner when they see one.

  • Reader

    International investors don’t care about the past except where it provides clues to the future. The clues from that scenario would be that rUK is fanatical about keeping its nose clean and that iScotland wants a free ride. Not good.
    In fact so bad that it won’t happen. Salmond is making a brave gesture for the benefit of the more excitable yes voters.
    When I was a youngster I went to school where there was a guy who didn’t acknowledge a debt unless there was something down in writing. Guess how often he pulled that trick?

  • dougthedug

    Where the unionists always tell us they’re going to rebuild a wall, Hadrian’s Wall.

  • dougthedug

    Scotland has no debt. It’s all with the UK and the UK has said that it will be the successor state, inheriting all the rights and obligations of the current UK which currently includes Scotland.

    It will not have to renegotiate its way into the EU or NATO because it will be the successor state.

    It’s an rUK/Scotland negotiation about how they equitably share the costs of the liabilities and assets of the pre-Scottish independence UK.

  • kensei

    The idea that markets would react badly to Scotland refusing the debt is pure speculation. They are at least as likely to see a country unburdened by previous – still backed by rUK remember – as a great opportunity. Even if they do demand higher rates, there is an equilibrium point vs actually having UK debt.

    The idea of no plan b is also pure speculation on your part, Mick, with no real evidence. You need to deal with the fact that it is not politically expedient to admit to it, even in the face of some hurt because you dont muddy the message in the campaign.

  • What if Orkney/Shetland says no and negotiates to stay in the rUK, or wants own independence. Oil off the table. It is not impossible.

  • dougthedug

    1. Scotland is not going to be partitioned.
    2. In a fantasy scenario where Orkney and Shetland stayed with the UK then as UK exclaves in Scottish waters they’d get a 12 mile limit under the United Nations Convention on the Law of the Sea. (UNCLOS).
    3. Scotland would keep the oil.
    4. As far as independence goes there are no Shetland or Orkney national movements and never have been.

  • New Yorker

    The Irish Free State had a proportion of the UK debt and had it excused in a deal over the Border Commission.

    The idea that an independent Scotland would not be responsible for a percentage of the UK debt when they were part of the UK is contrary to financial history, common sense and is wishful thinking.

  • Reader

    And that is Salmond’s last territorial demand in Europe.

  • dougthedug

    No Reader, that’s the unionist territorial demand. They want us to have what’s north of Hadrian’s Wall. They keep talking about rebuilding it.

  • mickfealty

    You’ll love this Doug… http://goo.gl/b63P3s

  • mickfealty

    Not speculation, a suspicion. Now, parse that!

  • kensei

    I suspicion differently. I’m not sure of the value.

    I think you need to explain the political angle. Sal!omd was pretty slick on Dimberly tonight, but he basically did not get specific at all on areas of concern – would prices rise, what points of negotiation might you lose, what about the currency. Now for me, that was a bit weak. You either believe that’s because he doesn’t have an answer, or you think that’s because there is a deliberate strategy for a positive campaign.

    Salmond is clearly very clever and he’s looked like a Titan compared to the Westminster leaders at points. I look at the 2011 SNP campaign too. There is a deliberate choice there, for me.

  • Reader

    The unionist ‘demand’ is a no vote. I think you may actually be referring to English separatists. It appears that many of them, like some of their Scottish equivalents, don’t know that Hadrian’s wall lies entirely in England and that there are probably a couple of thousand square miles of England to the north of it.
    http://theconversation.com/scottish-referendum-causes-a-surge-of-interest-in-hadrians-wall-but-its-misplaced-27047

  • dougthedug

    It’s actually not that bad if you stop thinking of the writer as some sort of Colonel with a large moustache and it just reinforces what I’ve been saying to my fellow Scots.

    If we vote No then Westminster won’t differentiate between good jocks and bad jocks. Voting No won’t save you from Westminster’s revenge.

  • barnshee

    “the Irish Free State had a a currency union until 1928 and then for years after wards had a de facto currency union as old British coins and the new Iirsh coins were used interchangeably. Once again looking at Irish history gives answers to Scotlands future

    You might cast your mind back to when the currencies diverged and the items that were “used interchangeably” ceased to be so overnight.
    The “punt” went to 70 odd “p” sterling if my memory serves me right

  • gunterprien

    “Ah I see— partition -where will the border be?”
    In your head perhaps?