Bond Vigilantes, Credit Ratings and The Scotsman

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By Russell Bruce

Flashed up at the end of Newsnight Scotland was the Scotsman headline for today in tabloid redtop style ‘Threat to top credit rating in separate Scotland’

So just what is the source of this story? Should perhaps The Scotsman not be more worried about its own credit rating with plummeting circulation, high debt ratio to assets and earnings per share growth of minus 59% last year although they have pulled that back to minus 34% this January.

By Russell Bruce

Flashed up at the end of Newsnight Scotland was the Scotsman headline for today in tabloid redtop style ‘Threat to top credit rating in separate Scotland’

So just what is the source of this story? Should perhaps The Scotsman not be more worried about its own credit rating with plummeting circulation, high debt ratio to assets and earnings per share growth of minus 59% last year although they have pulled that back to minus 34% this January?

Now I would not want readers to think that I am having a go at the Scotsman – just a bit of inter media banter by way of introducing another perspective on the ‘story’.

Yes back to the source. Is this a glossy research publication from a company of fund managers? Well no! It’s a blog from a bunch of guys at M&G Investments who do party pieces under the band name of ‘Bond Vigilantes’ – music and dancing optional.

The blogger, Jim Leaviss of the Bond Vigilantes combo, is simply writing a Happy Hogmanay piece that he admits is no more than back of the envelope doodling.  Many of the statistics he uses are out of date and he has not kept up on the latest data on oil resources or income projections.

He quotes his sources and the dates and in that context it is not an unfair appraisal for what is not much more than a New Year wind up.

Bill Jamieson, who wrote the Scotsman article, in reality pretty well undermines the implication of the headline.  So is this just The Scotsman also having a New Year wind-up or a less than subtle piece of unionist narcissism?

Jim Leaviss in his blog described Scotland’s position in regard to an AAA rating as follows:

“To be an AAA rated economy, you would hope to have a debt/GDP ratio of about 60% or lower (although there are now AAA countries with ratios heading to 100%), and that your interest costs would run at under 12% of your state revenues.

“Scotland’s GDP in 2009 was £143 billion (including all oil and gas produced in its waters), so its debt/GDP ratio would be 56% – respectable.

“The average interest rate on the existing stock of national debt is about 4%, so Scotland’s debt servicing costs would be £3.2 billion per year.   Scotland’s revenues from taxes and duties in 2009-10 were £41.2 billion, so its interest payments to revenue metric would be just 8%.

So on this basis Scotland’s debt/GDP ratio and percentage of interest payments to revenue are comfortably within the model ratios for a triple A rating.

Leaviss then goes to talk about the bank bailouts and notes this will no doubt be raised again by some English MPs. The situation is quite clear, we would have a share of the cash injection in regard to banking operations within Scotland and a similar share of the stake in the parts nationalised.  Accordingly he discounts this as adding to the debt calculations.

Turning his attention to what he refers as the ‘elephant in the room’ he uses 2009/10 figures of Scotland’s share of oil revenues to show that our debt ratio based on 2009/10 receipts of £6.5bn would reduce our debt ratio to GDP to 5%.

The comparative figure for the UK is 9%.

Bill Jamieson in his article goes on to make a number of assertions about triple A rating.

“Most small economies of an equivalent size do not enjoy a triple A rating, in fact it is quite rare.

“However, it would be crucial for an independent Scotland to seek to sustain as high a rating as possible as this would make government debt easier to sell.”

He then goes on to point out that Iceland and Ireland once had triple A ratings.  Was that when they were bigger countries Mr Jamieson?

The fact that neither now have triple A ratings is beside the point but let’s see if we can find other small countries in Europe that still have triple A ratings.

Norway, Sweden, and Denmark all have triple A ratings and are marked as stable. Finland also has AAA status but does not get the stable ‘gold star’ which seems to answer the question about small nations and AAA credit ratings.

A spokesman for Finance Secretary, John Swinney, said:

“Contrary to Mr Leaviss’s ‘guess’, the latest figures show that Scotland is the only area of the UK outside London to record growth in our Gross Value Added economic output between 2007 and 2010.

“And among the 12 nations and regions of the UK, Scotland is the third most prosperous in terms of output per head – behind only London and the South East of England.”

Jim Leaviss also questioned the future of oil revenues as a reliable income source for an independent Scotland believing that these were set to decline rapidly in the years ahead.  As a fund manager he really should be more up to speed on current known reserves and future income projections but perhaps oil is not his specialist area.

Interestingly, while on the question of oil revenues, Leaviss draws unfavourable comparison between how Norway has used oil revenues to create a Sovereign Wealth Fund while the UK spent the lot.

Jim Leaviss is raising some perfectly valid issues for discussion and his blog is but a contribution to a growing debate slowly developing in England.  We must be patient for them to catch up and equally start regular briefings  to the financial sector in England and well beyond.

It is not unreasonable for Leaviss to ask about growth prospects after Independence.  Scotland’s economic performance has moved up a gear since 2007 as the statement from John Swinney’s spokesman underlines.

The answer to Mr Leaviss is that until Scotland has full economic powers we are not able to power ahead and out of the low growth prospects of the UK.  That is a message Mr Leaviss and the financial sector can understand.

Scotland has a First Minister internationally recognised and a Finance Secretary who never fails to balance the books.  The markets will give us time to make the crucial changes following a successful independence referendum.

Betting against Alex Salmond is unlikely to be a good move for investment managers but they might go short on David Cameron.