By Stefan Bienkowski
The UK’s return to a triple-A debt rating “would be delayed” if Scotland chose to vote for independence in September’s referendum, ratings agency Fitch confirmed in a report on Thursday.
Westminster’s promise to honour any existing debt within the United Kingdom in the event of Scottish independence, whilst seeking repayment from an independent Edinburgh government, would lead to a 10 percent increase in the country’s debt to GDP ratio.
According to the report, the rUK faces a negative hit on its balance of payments, a trade balance that would lose 90 percent of the oil and gas revenues that would be handed back to the new state, an increased currency risk regardless of whether Holyrood sticks with Sterling, and overall a higher public debt if Scotland chose to become an independent nation.
This debt figure – which currently stands at 91 percent of the UK’s GDP according to the rating agency’s preferred methods of measurement – is far too high says Fitch and poses as the main barrier to Westminster’s return to a full triple A rating.
It has been over a year since the UK was downgraded from the AAA top debt rating to AA+ by Fitch, who initially stated that a break up of the union wouldn’t affect either country’s credit rating.
Now, the agency believes that a “widespread” impact would be felt within the rUK following the loss of Scotland, ranging from obvious political and legal issues to more precise consequences in economics, finance and trade.
Stating in the report, Fitch believes that in the case of a Yes vote, the UK government would handle the transition very carefully, as it would be in their best interest to ensure their neighbours to the north were “a success”.
“We believe that there would be additional, albeit likely moderate, risks for the UK, which would put downward pressure on its ratings,” said the report.
“Fitch Ratings assumes a No vote in September’s referendum on the question of Scottish independence, based on polling figures.
“However, a Yes vote merits close analysis as a potentially relevant event for the remaining UK. In the event of a Yes vote we would review the UK’s rating, which we would continue to maintain after Scotland became independent.”
The report adds: “The UK Government has stated that in the event of Scottish independence, it would in all circumstances honour its issued stock of UK debt.
“This would lead to a one-off increase of 9.5% of GDP in the UK gross public debt ratio as Scotland dropped out of the UK GDP from 2016.”
Fitch also stated in the report that it believed in such a scenario, the Scottish and UK government’s would agree a long term loan to pay off Holyrood’s proportion of the debt, yet that in itself would not be considered a standard asset and as such would not come off Westminster’s total debt.
Focusing on the UK debt, the report concluded that although the rUK would lose a proportion of it’s GDP without Scotland, it would in fact still keep all of the nation’s debt, despite any agreement between the two nations.
“We assume Scotland would gradually repay its loan to the UK,” the report said, “However, it would be illiquid and leave the UK exposed to Scottish credit risk, at least in the early years of independence.”
On the issue of currency arrangements between Edinburgh and London, post a Yes vote, Fitch added: “Scotland’s monetary regime post-independence would also have implications for the UK. There is a range of hypothetical options – from a pegged or free-floating currency to a currency union – although the three main UK political parties have ruled out a currency union.
“All options would pose some new risks to the remaining UK.”
The rest of the UK would “seek to protect its interests but it would not be a zero-sum game”, the agency said.
“It would be in the best economic interests of the UK to ensure that an independent Scotland was, in the broadest terms, ‘a success’.
“Therefore, we expect that a compromise would be reached that is not punitive for either party.
“Given the institutional strength of the UK, we would expect the transition to be managed very carefully, avoiding major financial dislocations. Were this not the case, the pressure on the ratings would be much higher.”
A Scottish Government spokeswoman said: “This Fitch report shows exactly why it will be in the overwhelming economic interests of the rest of the UK to negotiate fairly and openly with Scotland following a vote for independence, ensuring a smooth transition.
“Our proposals for a formal currency union, which fully take account of the integrated cross-border banking sector, and which include rules for joint fiscal prudence, makes sense for the rest of the UK.”
A Better Together spokesman said: “This report further reinforces the huge risks involved in leaving the UK and then trying to establish a eurozone-style currency union. That is precisely why it has been ruled out and why another opinion poll published today shows that the majority of people in the rest of the UK are firmly opposed to it.”