Scotland's credit rating at risk - expert

THE ability of the Scottish Government to make the most of new financial borrowing powers could be jeopardised by constitutional wrangling and the prospect of an independence referendum, a leading financier has warned.

John Maciver said uncertainty over Scotland's future role within the UK could damage its credit rating when trying to attract overseas investment.

The banking and finance expert, and partner in Glasgow-based law firm McGrigors, urged caution after Chancellor George Osborne announced the Scottish Government will be able to borrow more money by issuing bonds to access cash from capital markets and protect itself from sudden jumps in public spending requirements.

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Mr Maciver warned that ministers' bonds, which he described as "like an 'IOU' issued on behalf of the government", might not have a high credit rating because of constitutional wrangling.

He said that while the new powers would be "a useful economic lever to help the recovery" north of the Border, the "path towards raising funds for investment in Scotland remains unclear".

The Chancellor, speaking in the Commons yesterday, described the new powers for Holyrood as "important changes" and said they would give the Scottish Government "much greater flexibility" in raising finance and spending.

However, First Minister Alex Salmond said the additional responsibilities for Holyrood were just a "concession" and a "down-payment" on further demands the SNP Government is making, such as devolving corporation tax, excise duty and Crown Estate property.

Mr Maciver said that the power to issue bonds would, for the first time, allow Scottish ministers to be able to attract investment from overseas.

However, he added that "it remains to be seen" how Scotland's credit rating would be viewed by potential bond customers, because of its lack of a "track record of borrowing."

He said: "It will be interesting to see how the Scottish Government is rated by the rating agencies and whether it is able to benefit from a 'AAA' rating, as the UK presently is.

"The lower a country's rating, the higher a rate of interest it has to offer in order to attract investors, so the rating is crucial.

"Scotland should be at least as well-rated as the UK.

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"However, the rating agencies would likely look at how Scotland is funded, and the present uncertainty over the eventual constitutional settlement for Scotland might be considered to be a risk factor."

Mr Maciver urged Scotland to follow the examples of other small countries, such as the Scandinavian nations, which have good credit ratings.

He said: "The rating is about creditworthiness rather than the size of the country - small countries like Finland and Denmark are rated 'AAA', while large countries like Brazil and Russia are rated 'BBB', several notches down the scale."

The First Minister expressed concerns about the "size and scale" of the powers being handed to the Scottish Parliament.

Mr Salmond said: "Let's welcome the element of concession today as a down-payment on what Scotland needs to get our economy moving.

"Looking at the statements made today, I doubt if it's of the scale and the size that the Scottish Parliament is looking for - not just what the SNP or the Scottish people are looking for."

Mr Osborne said the Scotland Bill represented the biggest transfer of fiscal power from London to Scotland since the creation of the UK.

He said: "The Scotland Bill represents a major devolution of responsibility to the Scottish people for raising taxes. It is proof this government is delivering on the promises we made to the Scottish people. I always said that if ideas were put forward by the Scottish Parliament to improve the way the new fiscal powers will work, I would listen carefully and treat them with respect. So today, I am very willing to offer these important changes.

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"They will give the Scottish Parliament and Scottish Government much greater flexibility in the use of their new tax and borrowing powers.

"The far-reaching changes we are introducing means that the Scottish people and their elected representatives will be much more responsible, not just for decisions on public spending in Scotland, but also for the Scottish taxes needed to pay for those decisions."Scottish Secretary Michael Moore said the measures would protect Scotland's budget from "sudden shocks".

He added: "We are introducing a mechanism to protect the Scottish budget from sudden shocks. We are also opening up the possibility of future Scottish bonds and bringing forward partial borrowing powers so that work on a new Forth replacement crossing can begin in this financial year.

"Along with other measures in the Scotland Bill, these proposals will allow Scotland to shape the economy we want and generate the jobs we need."