If Only I Was Clever Enough

I wish I knew something about economics. Perhaps you do. If so, read on for a laugh. First of all, isn’t it obvious that the British Treasury takes responsibility for all debt it has incurred? I know there is a need to “calm the markets” but if they issued these debt bonds in what are legally binding agreements, what else could they do but promise to pay?

If I take out a mortgage and sub let the property, I still owe all the repayments to the building society, even though I’m getting rent from my tenant. When the payment is due, the society won’t ask the tenant for the cash, they’ll come looking for me because I signed the legal agreement.

So it one level the Treasury declaration was a statement of the bleedin’ obvious. I daresay they’re also trying to avoid demands for extra income from future gilt trades. It does imply though that Scotland has no legal requirement to pay a share of UK national debt. It will remain a British obligation, they say until the moment of separation, but how can that be? Even at the point of separation – I prefer moment of independence – debt issued by London remains London’s debt. A future Scottish state didn’t sign up for the £1.4 trillion albatross and, as a net contributor to the UK Exchequer, could adopt the same sniffy approach the British adopted to naval contracts on the Clyde – we’re in charge here and it’s not our problem.

Yes, I know that won’t happen, but it does demonstrate just how powerful a hand Scotland is dealt when you consider that a total breakdown in talks resulting in a stand-off or even a walkout leaves the burden of massive national debt being held by the Unionists staggering under its weight until agreement is reached. Scotland’s negotiators can decide how much is to be paid back in compensation – to the Treasury, not the government’s debtors – and when. I imagine London is looking for a big cheque to bung in the bank but that would require a massive national loan to be raised by Edinburgh and might put too heavy a strain on Scotland’s fledgling economy, so a longer-term arrangement might be struck, but that will be less than London would have wanted.

I raised an eyebrow too at the analysis of Dr Angus Armstrong of the NIESR when he pointed just how big a blow this will be to the rUK. Not only does it lose 10 per cent of its economy when Scotland leaves, but that changes the arithmetic so increasing rUK’s debt to GDP ratio, taking it over 100 per cent. What that appears to mean is that the moneylenders regard you as more of a risk and demand more in interest and those financial vultures, the rating agencies, may downgrade you – again – and that also leads to higher interest charges. This flatly contradicts the casual dismissal of independence as an irrelevance by the Little Englanders who sneer at Scotland’s “pygmy economy” and brag about how little they will miss us.

It also shows that the public line about not negotiating in advance is, if anything, a hindrance to them as well as to us. If it’s true that this announcement followed market  jitters, you wonder if it would have been needed at all if talks were under way between Edinburgh and London and ministers from both sides could emerge smiling in reassurance. The idea that they might be reaching an amicable understanding on the debt might have quelled doubts. Instead it seems nobody out there could trust what was going on.

But doesn’t it also neuter the No side’s constant balancing of assets and liabilities in the UK’s favour? The dark hint is that we have the liabilities but not necessarily the assets, a ludicrous assertion now revealed as exactly that. They have now conceded the liability is theirs and have to hope Scotland follows their argument and agrees to pay up – which it will – but the moral high ground is taken by Salmond whose claim to the assets is made so much easier.

To sum up, here’s a quote from Richard Murphy of Tax Research, a no-nonsense money man I’ve interviewed many times who revealed the true scale of tax avoidance: “…given that this was, no doubt, to be the subject of major negotiations with a new Scottish government, this statement is the most massive exercise in shooting one’s self in the foot: Scotland now starts from the position that the debt is England’s problem.”

Am I naïve to be asking another question…if the markets demanded this clarification on debt, might not the currency traders do the same with sterling? Where there is uncertainty, they demand reassurance. If they thought rUK might lose the value of the North Sea from its balance of payments for example, or if they thought Scotland, as a major trading partner, would use sterling but have no formal agreement with the central bank, might they consider its value was diminished? Might sterling be threatened with being “sold short” and other traders start a trend leading to currency devaluation? Sounds far-fetched, I suppose. But it need not get to the stage of actually happening, if voices in the City pipe up about the possibility, mirroring what happened over debt. The Treasury and the Bank might feel obliged to reassure them in some way…perhaps by declaring that, in the event of independence, sterling will retain its value by the formation of a currency union between Scotland and England in which the Scots will use the pound and the Bank of England will anchor it.

Wouldn’t that be fun? George and Danny forced by the market to reverse their strategy of pretending there will be no currency agreement. I imagine they would say it never was their actual policy to prevent a currency union, they just hinted it might be difficult…And it’s true – they never have said No. Danny was asked again yesterday on the BBC and weaseled his way out. I think though we can now dispense with the British government playing politics on debt, viz: Transferring to an independent Scotland its agreed share of UK liabilities would be fraught with difficulties. Creditors might not agree to a straight transfer of public debt from the UK to an independent Scotland on otherwise identical terms. The Scottish Government should explain to voters before the referendum how it would in practice take over its agreed share of UK public sector debt and future liabilities on independence.”  The first two sentences have been sorted by themselves and the third requires them to enter into pre-vote talks which they won’t.

I’m wondering if this whole affair is really the result of political decision-making though. I’m more inclined to the view that the Civil Service, Treasury officials, the UK Debt Management Office, realized the political line could not be held on the debt and intervened, demanding a statement in the national interest. That’s their job, isn’t it. They step in and ask that the politicking stop because something has happened which is more important and the politicians do what they’re told, however reluctantly. The chain is: Financial sector dictates, civil servants pass it on, politicians obey.

Mind you, there are looming questions here for Scotland, not least just what share of debt does Mr Salmond, as he’s morally bound to do, accept, as there are different measures available, although I reckon this statement strengthens his hand. How will the same market types regard Scotland as a risk and how much will they demand in interest and how does Scotland repay London? One suggestion is that, instead of borrowing from the markets – OK, the spivs in the City – a Scottish central bank prints its own – surely one of the joys of independence, no?

Another would be ridding ourselves of Tory toyboys Danny Alexander and Alistair Carmichael who continue to traduce the radical, home rule traditions of their party by sounding like right wing English backbenchers determined their own country and constituents should be made to suffer if they don’t get their way. I think Honey Bear Carmichael blamed the whole matter on Salmond threatening to renege on the debt when, ironically, he was pointing out that the quid pro quo for Scotland taking its share was sharing the currency. And you know the politicians are at it when you hear the phrase devised by the pipsqueak spad in the back office repeated on air, thus Danny’s cringe-worthy Separation Surcharge. Aaaarrrghh!!??

 

Incidentally, who ran up those debts of £1.4 TRILLION…can anyone remember their names?

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54 thoughts on “If Only I Was Clever Enough

  1. I suspect that it the Governor of The Bank of England, George Carney, who has made the running on this.

    The announcement made by The Treasury, in the name of Danny Alexander, was a wee figleaf for Cemer-Clegg.

    This one is a real game changer, not a vote winner, but a confirmation the Eck has been playing a quiet stormer, and will take the wind out of the Naw side, possibly even rock their morale. Note the use of an e in the last letter in the preceding sentence.

  2. The first two sentences have been sorted by themselves and the third requires them to enter into pre-vote talks which they won’t.

    Weasel words.

    Ah, but I bet George Carney could and probably has.

  3. I was genuinely non-plussed at the SNP’s reaction to the UK Treasury’s announcement yesterday. To treat the announcement that the markets were nervous about a separate Scotland’s ability to service its debt as a triumph for the forces of separation is surely a spin too far.

    For the SNP to continue to threaten to let a separate Scotland default on its debts will continue to undermine our economy and there is a very real threat that the SNP’s continuing bluster could end up costing us all as the money markets get increasingly jittery at the prospect of default.

    I’m also really puzzled at the SNP’s enthusiasm for a currency union with the rest of the UK at all. It should be anathema to them. Why on earth would the SNP want a separate Scotland to have to get approval from a foreign government on their borrowing limits or indeed have a foreign government’s central bank deciding their interest rates. It simply doesn’t make sense.

    Finally, the argument that there should be pre-referendum negotiations is an affront to democracy.

    Put simply the SNP have no mandate to negotiate on separation and won’t have until the Scottish people vote for it.

    • Grahamski —-a shared currency is transitional as a practical measure to smooth out any upheavals —whats your problem ?

    • The markets were not worried that Scotland would default. Scotland has no debt to default on.

      They were worried that the UK would default. A debt exchange into Scottish and UK bonds would lead to at least a technical default under rating agency criteria. Either the rating agencies or investors or both pointed this out to the DMO and they were forced to act to prevent a hike in yields.

      It would be interesting to know if the Treasury was inept enough to think that the exchange route was an option – McFall’s commentary last night seems to suggest that they may have tried to explore it. If true it shows surprising ignorance of how rating agencies approach debt exchanges.

      There is no obligation on Scotland to take on any debt. Russia took on all of the USSR’s debt and Ireland didn’t take on any debt on independence either. These are the key precedents No campaign lawyers keep citing in the hope that no-one will object to the rUK hanging on to a security council seat it risks losing if the rUK is not deemed to be a continuator state.

      Markets are not nervous about Scottish debt, principally because it doesn’t exist and they don’t own any of it.

      Markets were worried about the UK reneging on its obligations and they will now be to some extent concerned about the credit strength of the UK without Scottish revenues (they won’t give much credit to the on-loans partially thanks to the No campaign denigrating Scotland’s post-independence economic strength).

      As someone living in Scotland you should be delighted that your country now has the stronger hand in the post-independence discussions and pleased that Better Together’s allegations about “default” have contributed to this outcome.

      • Hi Mr Turner

        Not according to John Swinney it isn’t.

        This is for the medium to long term.
        ———–
        grahamski ,the long term being at the most ten years is what John swinny suggested —thats transitional
        incidently ,I thinK John is thinking paying off Scotland`s share of UK debt and then going for a Scottish currency

    • Scotland and Holyrood don’t have any legally enforceable debts. It may suit us to take on some of the continuing state’s in exchange for assets we want but a clean break is so common in international legal precedent for good reasons. If Greater England plays nice then of course we will be happy to do a deal but there are cheaper ways of equipping ourselves for our future if less convenient.

    • Oh your not a fan you really need to stop believing the deluge of propaganda mostly half truths & downright lies about what’s going on , The SNP simply stated in reply to the chancellors speech the facts that the UK government as confirmed in the past few weeks are the holder of all UK debt and as for pre negotiation you seem to disapprove well it wasn’t the SNP who started it was the .no not ever lot .and this day and daily drip drip through a very compliment media led in most part by the impartial BBC , example and played every hour on the hour the personal view of the European president that Scotland would in his words never join the union now as it’s never been done before no one knows there is no president or case law on it to refer to , he is simply trying to make sure no president is set by Scotland becoming independent as a comfort to the Catalan region of his country Spain and yet it’s presented as gospel ,you as stated are against Scotland becoming a normal democratic country well they are and it’s growing daily a lot of people who do

  4. I agree wholeheartedly that yesterday was a statement of the bleedin’ obvious by HM Treasury and I suspect that a second statement of the bleedin’ obvious may to be too long in coming.

    You may Google till your fingers bleed, but while you’ll find plenty of nonentities making noise about no Sterling Zone (Darling, Alexander, etc.), you’ll not find anything definitive on the record from Cameron or Osborne: The utterances of the big boys affect the markets and I’ll bet they’ve been briefed by the BoE to keep their traps well and truly shut on this issue.

    You need only look at the births of independent Australia, New Zealand, South Africa, Ireland etc. etc. ad nauseam to see that the operation of a Sterling Zone without Sovereign control of the (now even fully independent) BoE is not a big deal.

    • Mr MacDonald

      “..control of the (now even fully independent) BoE..”

      The BoE is wholly owned by UK Gov and directed by the Treasury.

      Not sure why you imagine it to be ‘fully independent’; it is as ‘independent’ as a separate Scotland would be ‘independent’ – as in not at all….

      • It is directed only inasmuch as the UK Chancellor sets the inflation target. If you can imagine the foreseeable circumstances in which a Chancellor will vary the target that has always been set (2%), or even if what circumstances an independent Scotland would wish some other inflation target to be set, then I look forward to you demonstrating your erudition rather than, as usual, your ignorance.

      • Poor Grahamski. You’re farting in the wind with your nonsensical posts. Wanna bet that soon there will be another announcement from the Treasury saying that “during AT LEAST the transition period Scotland and rUK (aka England) will CONTINUE with the existing Currency Union using the £Sterling; just like Alex S and all sensible people say should be the case. AS has got you by the balls and you’re squirming.

  5. The SNP aren’t threatening to let an independant Scotland default on it’s debts. The debts all belong to the UK. Since Scotland going independant is a new state according to Wesminster’s own lawyers (“Scotland ceased to exist as a state in 1707”), I think it’s increadably nice of the SNP to offer to take some of the UK’s debts off its hands. The fact that they have no legal requirement to do this, yet it’s what they’ve been saying that they’ll do all along just continues to show the difference in how reasonable the two sides are being.

  6. I agree with you Derek, I am thinking the same about the currency. I give it till March before the currency traders start looking at the currency and begin to think about a Sterling crisis post independence. But I feel Mark Carney is well aware of how all this will play out and knows a currency union is the rUK’s best option.

  7. HMG refusal to confirm Scotland’s position re sterling was part of the fear factor to frighten the daft jocks into voting NO. Unfortunately they have scared the financial markets even more with all this uncertainty, the jocks don’t matter the money men do. I bet not only have HMG told the money men that of course UK is responsible for all UK debt, but don’t tell the dumb jocks of course they can use the £ we need them more than they need us. As the money men know UK needs Scotland’s GDP to maintain their credit rating.
    We now hear mr Peston (BBC) tell us Scotland could be charged extra 1.5% on int rate from where UK is at the moment. I wonder why mr Peston didn’t ask what the UK int rate would be if they downgraded their credit rating if they removed Scotland’s GDP from the sterling balance sheet.
    The whole Fear campaign is unravelling fast and spooking the horses Alex Salmond has read the hand perfectly up to now. HMG plan is in tatters so watch this space as from here on in it will be made up on the hoof.

    • Mr Docx

      You seem confused.

      Nobody denies a separate Scotland could use the pound.

      However, the idea that a separate Scotland could use the BoE as lender of last resort without its spending and taxation plans first being approved by UK Treasury is fanciful.

      • Do tell: Why would the BoE being lender of last resort require the UK Treasury to approve Scottish fiscal measures? Or are you just parroting something Foulkes said as usual?

      • Isle Of Man BOE U/W :”The Isle of Man has relatively low taxes and this has encouraged a major offshore financial sector that accounts for most of GDP. Over recent years the Manx government has made a concerted effort to cast off the island’s reputation as a tax haven, signing tax information exchange deals with over a dozen countries.

        Care to explain Grahamski?

      • macgilleleabhar

        Grahamski, Do you really believe that the BoE without Scotland would be in any position t associated with approval except to beg it from the Scottish Treasury? After all ,Grahamsky look at the parlous position the BoE is in now even including the main tangible Uk assets that will be after INDEPENDENCE be the property of The People of Scotland.

    • Would you please stop using the phrase “dumb Jocks” or variants thereof. It is unhelpful to the cause. Remember it is not only the Scots and English who read such outdated cliches.

  8. Grahamski: you have me totally confused. How can a independent Scotland default on loans that the UK are responsible for? I think you are getting mixed up and a bit confused.

    • Papadox, It’s definitely Grahmski that’s confused here, the logic of the situation is quite simple but obviously not sufficiently for those incapable of common sense.

    • A separate Scotland will have to take on its share of UK debt in the unlikely event of a yes vote.

      Nobody serious denies that, why even in their more lucid moments messrs Salmond and Swinney accept this.

      The SNP however continue to bluster about defaulting in a fairly crude and infantile attempt at blackmailing the UK government into accepting a currency union.

      Unfortunately for them (and us) if a separate Scotland should refuse to pay its share of debt (or even threaten to do so) for whatever reason then the consequences would be catastrophic for us.

      It really is unfortunate that the SNP think it acceptable to introduce threats like this into the debate. If they truly cared about Scotland they wouldn’t play so fast and loose with our reputation.

      • The precedents of Russia and Ireland show that no debt is a possible option. The SNP is being exceptionally generous in its negotiation position. They would be within their rights to start by asking England to raise additional debt to compensate Scotland for the fiscal transfers Scotland has made.

        Scotland has no “share” of debt. The contract is in the name of the UK. The UK government has stated that the state formerly known as England will continue to be the UK post-independence and will continue to pay the UK’s debts.

        It is impossible to default on debts that don’t exist.

        Financial markets will have no problem with Scotland negotiating the lowest possible share of debt. Financial markets like borrowers who are commercially competent.

        Financial markets did have a problem with the UK potentially proposing to default on its debts.

        It is comical to suggest that having no debt would be “catastrophic”. It would put Scotland in the perfect position to borrow cheaply. Low debt is a good thing. I appreciate that no-one in the Labour party has ever understood this.

        For the UK to get any credit for debt assumed by Scotland, the markets have to have confidence in Scotland’s economy post independence, and it’s important that they believe Scotland will be a sterling zone. It’s hard for either of these things to happen that given the messages coming out of the No campaign.

        If Labour cared about either Scotland or the UK, it wouldn’t have systematically trashed Scotland’s economy post independence at every available opportunity.

        It “really is unfortunate” that Better Together made infantile threats that Scotland would not be able to use the pound or be part of the EU or be part of a common trading area. Perhaps if the No campaign hadn’t played so fast and loose with Scotland’s reputation financial markets would not have taken fright in the way that they did.

      • Ok let’s have an example of the SNP shouting that we are no paying our debt or is its something you heard can you imagine the panic in the money markets if that was the stated aim of a government any government after a successful “YES” vote the SNP have stated they will shoulder out part of the debt still to be worked out and negotiated on

      • Real world here . it is not, has not ,never will be stated by Alex salmond that Scotland will renege on debt owed it has simply been pointed out legally we are not responsible for UK debt the UK owns the UK debt ,and as you state the SNP are not shouting it ain’t our debt and we are no paying they have made a offer to be nice and cooperative that has been rejected by mr Osborne

  9. “Dr Angus Armstrong of the NIESR when he pointed just how big a blow this will be to the rUK, so increasing rUK’s debt to GDP ratio, taking it over 100 per cent.” I think he mentioned 115%, nobody seems to have picked this up, Derek.

  10. Sometimes in life you wonder if we all live in the same universe. Quite how the UK reacting to the markets concerns that Salmonds iScotland won’t pay its debts is a victory for the SNP is beyond me.

    To use an analogy, if you went down to the bank to get a loan and the manager said that he wouldn’t lend to you without your next door neighbour (who incidentally you don’t like very much) giving a guarantee as well as having the right to enforce the debt against you you wouldn’t be very happy would you? That is unless you are a nationalist… I think the nationalists are needing to wake up and live in the real world.

    • cynicalHighlander

      @John McMad

      Banks lend on recoverable assets and the potential of a a successful revenue stream over the lifetime of the loan. Scotland exports more than it imports and has done for decades whereas the UK has been increasing its debt for decades as it tries to keep up the pretence of an imperialist world player.

      The markets are actually worried that the UK’s fiscal situation without Scotland retaining the pound are perilous for them not getting their money back.

  11. Allan Allanson-Oddy

    The debts were entered into by the UK and it is the UK government which is and will remain legally liable for those debts. By negotiation an independant Scotland would agree to contribute a percentage of the interest payable thereon and on the capital falling due to again pay a proportion.

  12. Sorry John, but when I read that my eyes glazed over.

    Any chance you could join the plain English campaign.

  13. John McMad, the point you seem to struggling to grasp is that an independent Scotland would have no debt other than that it chooses to take on as part of an assets/liabilities negotiation.
    It is the UK gov. alone who took out the loan and therefore has sole liability if they claim to be the sole successor state.
    To use an analogy if you and your partner shared a house and mortgage, upon separation would you expect to give up all rights to the property yet continue to pay the mortgage ? …. Moreover how would the bank view the lending risk to the sole debtor, without the benefits of joint income?

    Legally, politically, and yes, even morally it is rUK the money lenders will pursue with vigour after Scottish independence. The rUK gov. would have no right to enforce any debt on an independent Scotland … it can only trade assets for a share of the debt burden; a point well understood for many years by our economist First Minister, Alex Salmond.

    When you understand how the real world works, you’ll understand why independent minded Scots view this long overdue admission by the Treasury as a game changer.

    • I’ve got some advice for you don’t try to appear intelligent by commenting on things you don’t understand. Scotland will be made to pay its fair share. It will pay back what it is told to pay back and if Salmond tries to avoid doing that there will be trouble and iScotland will become an international pariah on the money markets. You have done what is commonly called “getting things arse for elbow”.

      and since you are on analogies perhaps you might pay attention to the one i have used above. It is a far more accurate description of the current situation. Scotlands economy is less than a third of the size of Londons and less than 10% of the UK so it isn’t as important as you would like to kid yourself.

      ps. our economist leader scraped a 2:2 and by all accounts he didn’t exactly cover himself in glory when he had a proper job. First grade liar, check, first grade economist, i think ill pass on that.

      • I have some advice to you. Don’t comment on what you don’t understand.

        Scotland will not be “made” to pay anything. The fair contribution to debts point comes from a treaty the UK has not ratified, and it applies only where there is a fair share of assets.

        The state formerly known as England has adopted a tendentious claim to be the UK which is unlikely to be successful if contested by all the nations of the world who don’t want the UK to have a security council seat. It has a terrible negotiating position.

        The Treasury has just done a good job of almost making the UK a pariah in international markets by suggesting that it might force an exchange on investors which would cause a default.

        Markets will not expect Scotland to take on any debt unless it gets an equivalent share of assets. A Scotland with no debt would be highly creditworthy and the precise opposite of a pariah.

        An English partner in a City law firm actually laughed when I told him about McFall’s “pariah” claim. You and your side are making yourselves look ridiculous.

  14. Is it only me or can anyone else see the sneer behind Aliisdair Darling and Danny Alexander’s masks.

    The sneer that says ‘ I don’t believe a single word of this mince I’m dishing out to you plebs but if it keeps me on track to trouser the big bucks a la Blair then I’ll stomach it’,

  15. Yes they now don’t even look like they believe anything they are saying in the No campaign.Particularly Danny Alexander he just lacks any sincerity.Its just a job for these guys,but for us its about our nation we want to save.Passion cannot be mimicked it comes from the heart not à set of statistics.

  16. James Coleman, Sorry if I offended you James not my intent. However the unionist side treat us with utter contempt with the drivel they expect us to believe, they obviously think we are, shall I say a wee bit slow and naive. Either that or they are totally incompetent and not fit to be running a game of bingo. Again apologise James will try to contain my ire.
    Regards

  17. Another fine acticle, Derek (as usual).
    I get the feeling that these events are unfolding exactly as A.S.
    anticiped & planned for.
    He truely is the consummate political strategist, the “Eckmiester”.
    Just a note for some of the earlier posters, the BoE head is Mark
    (Not George) Carney and he is Canadian.

  18. As a relative new-come to the site but remembering Grahamski from the Scotsman I can see that he is still as obtuse as ever. It is obvious, even to the most naive, that the money marker lender will be concerned about the rUK currency if there is no currency union. That being the case the rUK will have to be pragmatic, bit the bullet and accept a currency union. The sooner they do it the sooner the market calms down..

    • “..the money marker lender will be concerned about the rUK currency if there is no currency union.”

      And you imagine the money markets would be relaxed about the prospect of the UK underwriting a separate Scotland’s debt without control of its spending?

      Who is being naive now?

  19. On the widely recognised GIP (Grahamski Incontinent Posting) scale, the Treasury debt statement is evidently a big deal.

  20. Oh dear Grahamski why do you want to talk your country down all the time. That’s the aspect none of us understand. We are positive we can make this a better nation and we dropped the Cannae dae this cap in hand attitude 30 years ago. You are at best an Ostrich and at worst sycophant to your English masters.

    • I don’t talk my country down.

      I believe we can stand up for ourselves in the UK.

      You don’t.

      • Ha ha we can all tell your really a beacon of hope and looking forward to a bright future for your country it really shines through from your rants ha ha

    • Nov 13 – who says this ‘person’ is a Scot – who says it is one person – the plethora of direness it spews-out is a multi-band operation that keeps to working hours and even takes statutory holidays.

      Don’t feed this hydra-troll – no matter how much fun it is – let it wither on the vine.

      BTW, Derek another great article – commonsense and right on the button – the No mob really are deeply into self-harm with this stooopid political hara-kari.

  21. To be honest from the posts. I would suggest it’s someone who regurgitates Daily Mail articles without engaging the brain.

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