Tuesday, 14 January 2014

Scottish Debt

The only surprising thing about the UK Treasury statement that it will honour all UK debt, including Scotland's notional share, in the event of Scottish independence is that the statement needed to be made at all.

A gilt-edged security certifies a contract between a lender and the UK as a sovereign borrower. A contract cannot be unilaterally amended by one of the parties.

It is fair criticism to say that I should not have used the word default in my articles on this subject back in November, since that word might be understood as suggesting that the lenders risked not being repaid at all, rather than not being repaid by the beneficiary. Legally the UK government is responsible for its borrowing, irrespective of whether the whole of the UK or only a part is in receipt of the resultant spending.

The point that I made in November is still valid. The divorcing partner who refuses a fair share of the joint debt behaves immorally. Suspect behaviour raises the spectre of default in the collective mind of the market and that raises interest rates for the irresponsible partner's future borrowing.