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Wee Krankie And Her Bawbies – Scotland’s Debt After Independence

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One of the ideas that is floating around is that Scotland would spring independent into existence without any debt. No portion of the UK’s debt would be apportioned that is. This idea seems to come from Richard Murphy therefore we know that it’s wrong. As ever the task is to work out why it is wrong.

The answer being that Murphy simply hasn’t understood what is being said. Not that that’s all that unusual. Here he is at length:

There should also be common ground on another issue. And that is that there is actually already agreement that Scotland will have no liability for any of the debt of England, Wales or Northern Ireland  (although for all practical purposes, this is English debt) if it chooses to become independent. We know this because the UK government issued a publication on this issue in 2014 under the title[1]:

UK debt and the Scotland independence referendum

In this the UK government, based in London, said:

In the event of Scottish independence from the United Kingdom (UK), the continuing UK Government would in all circumstances honour the contractual terms of the debt issued by the UK Government. An independent Scottish state would become responsible for a fair and proportionate share of the UK’s current liabilities, but a share of the outstanding stock of debt instruments that have been issued by the UK would not be transferred to Scotland. For example, there would be no change in counterparty for holders of UK gilts. Instead, an independent Scotland would need to raise funds in order to reimburse the continuing UK for this share.

They added:

An entirely separate contract between the continuing UK Government and an independent Scottish state’s Government would need to be established. The respective shares of debt and the terms of repayment would be subject to negotiation.

In addition they said:

In the event of independence, the full spectrum of assets and liabilities – past, future and contingent – would need to be considered in negotiations between the continuing UK and Scottish Governments, on a case-by-case basis. This means that the negotiations would need to cover the arrangements for all forms of debt covered in this note, not just gilts and Treasury.

I think this really rather helpful because much of it summarises what appears to be legally, practically and politically both true, and necessary. In the process it resolves the first question. The UK government has said Scotland will not be liable for debts managed by London before independence. Instead anything owing is entirely down to negotiation. The idea that in that case Scotland has some fixed share of UK debt that it must assume can be dismissed: this claim has no legal or factual basis.

Concentrate upon what London is actually saying there.

“the continuing UK Government would in all circumstances honour the contractual terms of the debt issued by the UK Government. An independent Scottish state would become responsible for a fair and proportionate share of the UK’s current liabilities, but a share of the outstanding stock of debt instruments that have been issued by the UK would not be transferred to Scotland.”

What is being said is that the UK would be, as far as the holders of the debt are concerned, the nation standing behind the debt. What the UK is not saying is that Scotland doesn’t have to pay any of it. What it is saying is that the cheques will continue to come from London, backed by the full faith and guarantee of the UK. How much the UK can then chisel out of Scotland is an issue that doesn’t need to concern the holders of the debt that is.

Think on why they might do this. Currently the UK government has not defaulted on its debts, other than through inflation – and important consideration – since there actually has been a UK. This means that interest rates are nice and low upon it.

Now Scotland leaves and 10% – just to invent some number just as an example – of that debt is transferred to that newly independent Scotland. Where once you had £100 of UK gilts you’ve now got £90 of UK and £10 of gelts. The value of those gelts depends upon Wee Krankie sending you some Bawbies when she’s a mind to. The value of the gelts is less than £10, obviously.

This doesn’t change if it’s certain issues that are sent North rather than some fraction of every issue. Chopping up current gilts issuance into a UK and a Bawbie section devalues both of them. The Wee Krankie portion for obvious reasons, the UK part because if the Debt Management Office is willing to do that then what other buggeries might they get up to? Apportion some to the Senned? Make repayment of Liverpool’s portion rely upon confiscations from Derek Hatton?

It’s to the UK’s benefit to stand behind, legally, the debt taken on by the UK. Just as when Lloyd’s goes out to borrow money it is Lloyd’s which owes it. Your or my mortgage being repaid doesn’t impact the debt which Lloyd’s has put its name upon – that’s true of syndicated bonds based upon mortgages but they’re a different financial instrument, aren’t they?

Murphy is confusing these two issues. Not that such confusion over anything more complex than debits are the window side of the ledger is unusual.

The UK will remain the guarantor and payer of the national debt because that’s to the benefit of the UK. How much the rUK will try to gouge out of Scotland is an entirely different and subsidiary matter.

My contention would be that we throw them over the side debt or no debt. Let’s be done with ’em and who cares if we have to cough up over the years for having done so – at least we’ll not have to be continuing the current subsidies as we do so. And, obviously, we’ll be shot of ’em. Not very Unionist of me but who cares.

Murphy is confusing protecting the UK’s credit rating by not devolving some of the debt down to Wee Krankie and her Bawbies with how the debt will be apportioned under that overall guarantee. The two are very different things.

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expunct

in British English
expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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