Alex Salmond has once again (19 November) threatened that non-compliance by the rest of the UK with his demands to 'share' sterling and The Bank of England after Scottish independence could lead to Scotland refusing to accept its share of the UK national debt. I realise that this is campaign rhetoric. It is nevertheless misguided.
The markets are listening. They want to know what to do if they have to deal with an independent Scotland in the future. The more likely a ‘Yes’ vote becomes the more they will trawl through the backlog of such remarks for guidance on future Scottish financial policies. They will not like what they find.
Let us be clear. There are three important reasons why this demand is misguided.
- Firstly, sterling is not an asset it is a national currency. A currency is a claim on goods and services within an economy; it is not itself a good or a service. I have already explained in an earlier article the problems that are likely to face an independent Scotland that seeks to share a currency with its much larger neighbour.
- Secondly, The Bank of England is the official banker to the UK government and an instrument of UK monetary policy. Although its terms of reference are laid down by UK law, its independence from direct UK government control has been guaranteed since 1997. Scotland is seeking to leave the UK. SNP ministers claim to want control of the economic levers for themselves. In what way would this purpose be served by 'sharing' an institution that does not take orders from government?
- Thirdly, and most importantly, governments must never suggest defaulting on debt. They must not imply it, or hint at it, or say anything that may be misinterpreted as an implication or a hint. Everything that a First Minister or Finance Minister says is market sensitive.
The reason is that governments always need to borrow money. Even governments running a surplus on the budget need to borrow money, because, just like you and me, the timing of their income does not coincide with the timing of their payments. People who lend money to governments are sensitive to anything that makes them the tiniest bit afraid they might not get it back. Every such unguarded remark could add half a per cent or so the Scottish Government's borrowing costs after independence.
We may end up with a Scottish currency whether we like it or not, for reasons outlined in my earlier article. In any case, foreigners will have to hold Scottish paper with confidence. The more suggestions there are that Scottish ministers don’t understand the markets and are careless or glib with financial pronouncements, the more reluctant foreigners will be to hold Scottish currency or bonds. Scottish interest rates will have to rise to compensate for this perceived increase of risk. In consequence, Scottish investment will become more expensive and therefore Scottish economic growth will fall.
Is a point or two in the opinion polls today worth a point or two on the Scottish government's borrowing rate for years to come?