By Derek Bateman
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?
Courtesy of Derek Bateman