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Of Bonnie Scotland and her debts

I said I was afraid of how the separation of Scotland from the United Kingdom would be handled by our political leaders. Already the difficulties begin to become clear. As presented by the BBC and other leftish media yesterday, two things happened. Firstly, the money fairies expressed concern about the status of the UK's debts after Scottish independence. Secondly, the UK government assured them it would continue to be liable.

Alex Salmond chortled openly. The UK's negotiators had just weakened their position. Others attempted to explain that the assurances given to creditors did not mean an independent Scotland would walk away from its share of debt, but rather that the share-out of liabilities would have to be structured. This is far too complicated for most observers to grasp and so we are left with the overall impression that "Scot-free" may be a justified slur.

This neatly illustrates the current situation in the independence "debate". The SNP states the benefits of independence (both real and imaginary) almost entirely unchallenged. The Unionists fail to express their positions for fear of antagonising the famously touchy Scottish electorate by appearing to demean or to threaten them.

Because only one part of the Union is being allowed to vote on its future, the continuing UK (cUK) is positioned as a suitor. In such a sitution, you woo with flowers, meals and gifts - not hard explanations of financial reality. Hence the Scots are getting no explanation of the financial consequences of independence, but the likes of Gordon Brown are offering them new gifts to stay. The interests of the majority of citizens of the cUK who want the Scots to go are - it goes without saying - being thoroughly trashed by both sides.

Our creditors are bound to be considering the implications for them of independence, just as they would if a private sector borrower were in the process of dividing its business. If their debtor was a conglomerate, they might ask such questions as "when the Whisky and Tourism division separates from the Finance and Engineering business, will the two parts be new debtors, refinancing the entire debt, or will the smaller business be spun off with new debt raised to pay off a share of the old?" Or "Will the new owners pay a higher price to have the company debt-free so that we can be repaid from the increased equity?" 

Their questions will be similar in the case of the UK's sovereign debt. Uncertainty has a price and I suspect they have told HM Treasury that unless the post separation debt structure is clarified, they will start to charge the UK more today. HMG is constantly borrowing to bridge the deficit between its income and outgoings. The UK's credit rating was already downgraded last year. If lenders are nervous to lend to an entity they know well, imagine their nervousness about major change. 

In an ideal world, the two entitites would walk away with their fair share of the debt by dividing it in the same way they will divide assets. But the creditors will have a say in that. They have no obligation to consent to a division and are entitled to a say on the terms. For example, the BBC (without comment or explanation of the implications) interviewed a fund manager yesterday who stated the blindingly obvious fact that Scotland will have to pay higher interest on its debts. He explained politely that this would reflect its status as "a new borrower". In truth he and his colleagues have every right to be concerned about the prudence of the new government of a nation distinguished by an almost total absence of fiscal conservatives. 

So to achieve a fair result, the UK's sovereign debt will have to be re-structured. I would personally favour a total refinancing, because I would like the cUK to benefit from reduced interest rates. However, the most likely approach is that new debt will have to be issued to an independent Scotland to repay its share of the UK debt. That new debt will be at higher rates and there is nothing in the propaganda published by the SNP to suggest that an independent Scotland's leaders have given any thought as to how to service it. Salmond's stupidly gleeful reaction to the Treasury's statement of the bleeding obvious yesterday rather suggests the contrary.

I have tried to compare the situation with a corporate restructuring but perhaps that's too dry an example? Imagine how rapid a divorce would be if the parties got their decree absolute without first resolving the financial terms. Human nature being what it is, each spouse would imagine a favourable outcome from the negotiation. The spouse with the greater sense of entitled victimhood would be the more disappointed. Fair enough, but imagine how messy the settlement negotiations would be, how long they would last and how acrimonious they would become.

It was an insanely stupid political decision to allow a referendum without first agreeing the terms of independence. I don't fear independence per se - in fact, like most English people, I would welcome it on fair terms - but I fear the consequences of that stupidity for both sides and I don't trust my own leaders not to do something truly insane like guarantee the debts of a new Scotland.

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