The independent National Institute for Economic and Social Research (NIESR) has warned that an independent Scottish state would fail within a year if Scotland unilaterally takes the pound as its currency and reneges on its share of UK debt.
In a note Angus Armstrong and Monique Ebell write (emphasis added):
If Sterlingisation is combined with repudiating Scotland’s fair share of UK debt we expect this regime would fail within a year. Leaving aside that taxpayers in the rest of the UK would each face an additional £5,900 in debt, we believe that this ‘opportunistic’ behaviour would be seen as a default. As a result Scotland would be outside of the EU and capital markets leading to unprecedented degree of austerity and the eventual a collapse in the currency regime. Scotland would be better off introducing its own currency without losing its foreign exchange reserves first.
Although the Yes campaign have yet to commit to an alternative plan to a currency union with the rest of the UK, which all three major parties in Westminster have ruled out, Armstrong and Ebell have pieced together a likely Plan B based on statements made by First Minister Alex Salmond.
In his live TV debates against the Better Together campaign’s Alistair Darling, Salmond argued that an independent Scotland would still be able to continue to use the pound irrespective of the outcome of the vote. He told his audience that the currency “belongs to Scotland as much as it belongs to England” and threatened that Scotland would walk away from its share of the national debt if a currency union were refused.
If this is the pro-independence campaign’s Plan B, however, it risks isolating an independent Scotland from international capital markets for up to a decade and forcing harsh budgetary constraints as a consequence.
The paper suggests that if Scotland’s repudiation of its share of national debt is seen as a default then investors will be unwilling to extend further credit to the new nation:
The most important lesson from the sovereign debt default literature is not the higher borrowing costs, which are very much specific to each event. Moody’s reports that those states which default cannot borrow for an average period of 5.6 years up to final resolution and then 4.4 years afterwards. In other words, 10 years out of the market.
A perceived default would also throw Scotland’s plan to join the EU into doubt. As the authors point out, Germany in particular is likely to be unwilling to accept a country that has recently walked away from its debt obligations into the fold whilst it continues to press for painful reforms in struggling eurozone states such as Greece.
The paper ends with a piece of advice if the Yes campaign wins the vote on Thursday:
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.
Voters might also question whether Salmond ought to have formed a more credible Plan B before asking them to decide on Scotland’s future for the next 100 years.
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