SCOTTISH independence would pose a “moderate risk” to the credit rating of the remainder of the UK, a leading ratings agency has advised.
The UK faces higher public debt, a negative hit on its balance of payments, a deteriorating trade balance through the loss of 90 per cent of its oil and gas revenues and increased currency risks regardless of the money Scotland ends up using, according to Fitch Ratings.
Fitch downgraded the UK’s credit rating from AAA to a stable AA+ last year, advising that the UK’s gross debt ratio will need to drop before the top rating is restored.
A return to AAA “would be delayed” if the remainder of the UK shoulders the entire national debt upon Scotland’s departure, Fitch said.
Scottish First Minister Alex Salmond has threatened to withhold Scotland’s share of the debt if Westminster does not agree to share the pound in a currency union, following a pointed refusal by all three major UK parties.
Any Scottish currency option - a separate currency, unilateral use of the pound, a formal currency union or the euro - would cause “overall risks to the UK, as well as to Scotland, to be greater than those of the current situation”, according to Fitch.
Fitch expects the transition to independence would be managed carefully with compromises on either side, as it would be in the UK’s interests to make an independent Scotland “a success”.
A Fitch report on the Rating Implications of Scottish Independence said the impact of Scottish independence on the UK “would be widespread, ranging from political and legal issues to economics, finance and trade”.
“We believe that there would be additional, albeit likely moderate, risks for the UK, which would put downward pressure on its ratings,” it said.
“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.
“Our rating response would depend on the terms of the agreement between Scotland and the UK. We expect the transition would be managed carefully, avoiding financial dislocations. If not, the pressure on the ratings would be greater.
“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.
“As we have previously emphasised, the UK’s gross debt ratio will need to be lower than its current level and steadily declining before any upgrade to AAA, a prospect that would be delayed by such a debt shock.”
It 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 remaining UK would “seek to protect its interests but it would not be a zero-sum game”, according to Fitch.
“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.”