Scottish independence: UK debt to be guaranteed

Ex-Chancellor and leader of Better Together Alistair Darling: 'Markets see the referendum as a risk.' Picture: Ian Rutherford

In the announcement, in a paper published yesterday, the Treasury undertook to bear responsibility for all UK debt up to the point of independence, forecast to be 2016, in the event of a Yes vote in the referendum in September.

The move was seen as an attempt to ease uncertainty in the markets about potential disputes between a newly independent Scotland and the rest of the UK.

An independent Scottish government would become responsible for a “fair and proportionate” share of liabilities, the paper stated.

Yesterday, Alex Salmond said the position shows “common sense”.

The First Minister had previously suggested that Scotland would be entitled to refuse to take on debt of the UK if the UK government ruled out discussion on shared assets, such as sterling and North Sea oil revenues.

The Treasury took the unusual step of issuing a statement making it clear that it would “honour” all debt issued by the UK government until the proposed date of independence in March 2016.

The move followed a number of

approaches to the UK’s Debt Management Office from investors seeking clarity on the issue. Any risk of default in debt repayments could push up costs on the UK’s government’s £110 billion of annual borrowing.

Mr Salmond yesterday insisted the Treasury announcement leaves Scotland in a “very strong negotiating position” when it comes to agreeing a share of the debt in post-independence talks.

The Scottish Government has previously predicted this could be £56bn based on a “historic” share which Scotland has helped run up, or £92bn based on a per capita share.

Alistair Darling, a former chancellor and now leader of the Better Together campaign, said it was a “very sensible” move by the Treasury. But he warned that sterling “is a monetary system underwritten entirely by the UK government. It is not an asset to be shared like the CD collection after a divorce”.

Treasury Secretary Danny

Alexander said the announcement was made to ensure that markets which lend money to the UK continue to do so at “very low interest rates”, adding that he hoped the Treasury’s pledge would reassure jittery financial markets.

He said the announcement indicated that an independent Scotland would face a diminished credit rating on international markets, which would drive up the cost of borrowing, adding millions to the fledgling nation’s public finance debt burden.

Mr Salmond’s earlier comments that Scotland could refuse to take on debt if the UK government failed to deliver Scotland’s share of certain assets led to claims that he was threatening to “default”.

But yesterday he said: “Those documents make clear that we remain prepared to negotiate taking responsibility for financing a fair share of the debts of the UK, provided, of course, Scotland secures a fair share of the assets, including the monetary assets.”

In response to the suggestion he had threatened to default, the First Minister said: “The Treasury issued the debt, they are liable for the debt – nobody is talking about default, apart from Danny Alexander. By definition you cannot default on debt you didn’t issue – that’s legally impossible.”

He added: “Any market uncertainty in the gilts market has been caused by their own refusal to discuss the terms of independence before the referendum and it is their own insistence that Scotland would be a new state that lands them with the unambiguous legal title to the accumulated debts of the United Kingdom.”

But Mr Alexander said: “Everybody knows that an independent Scotland would be likely to face considerably higher interest rates, less credibility in the international finance markets.” He

insisted an independent Scotland would be required to take its fair share of UK debt to remain “credible” on currency markets.

“The worst thing in the world, I think, for an independent Scotland, would be to start its life as a new state – in the unlikely event that it is created – with a default on its debt obligations,” he said.

At the end of 2012-13 the UK’s public debt stood at £1.37tn. But figures published by the independent Office for Budget Responsibility at the end of last year predicted this would rise by a further £300bn by March 2016, when Scottish independence would come into effect after a Yes vote on 18 September.

In the event of independence, a new contract would be needed between governments following extensive negotiations, according to the Treasury statement. There would be no change to UK-issued gilts, or bonds.

“Instead, an independent Scotland would need to raise funds in order to reimburse the continuing UK for this share,” the Treasury paper states.

Public debt is soaring in the UK with a current deficit of about £110bn. This is the shortfall between spending on public services like schools and hospitals and the taxes raised to fund them. Efforts to get this under control are what lie behind the widespread cuts in public spending and the government’s austerity programme.

UK ministers have so far refused to “pre-negotiate” terms of independence for Scotland. But they have publicly ruled out a currency union in the event of a Yes vote, warning that the different size and nature of the UK and Scottish economies could lead to the sort of problems which have afflicted the troubled Eurozone.

The Treasury paper states: “In the event of Scottish independence from the United Kingdom, 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.”

Last night, Prime Minister David Cameron’s official spokesman said: “Both the UK government and the Scottish Government have already said that in the event of Scottish independence – which is something that the PM and those who share his position will be continuing to argue against – an independent Scottish state would become responsible for a fair and proportionate share of the UK’s liabilities.

“What the Treasury is doing today is providing clarification for investors. In the unique circumstances of the independence campaign, it is right to do what we need to at a technical level to ensure UK credibility and confidence in the debt management operations.”

Asked what leverage the rest of the UK would have to ensure Scotland paid its share of liabilities in the case of independence, the spokesman said: “In the event of a Yes (vote), there would have to be bilateral negotiations involving the UK government and the Scottish Government.

“We are not going to get into a pre-negotiation. I’m sure that those on the other side of the argument may want to try to drag us into that, but it is not what we are going to do.”

Blair Jenkins, who heads the pro-independence Yes Scotland campaign, backed the UK government’s announcement and called for a similar “common sense” approach on the Scottish Government’s proposal for a currency union.

He said: “The UK government are so desperate to make independence seem as difficult as possible that they are still ignoring the fact that it’s in the interests of everyone for Scotland to keep the pound after a Yes vote. Alistair Darling himself has called a currency union ‘desirable’ and ‘logical’, and polls show that over 70 per cent of people in the rest of the UK back the position set out in the white paper. It’s time for the UK government to quit their fearmongering.”

• Click here to read the policy paper on UK debt (PDF)

• Peter Jones: Money markets matter more than MPs

• Oil for debt swap proposed

• What would happen to Scotland’s share of the national debt

• Analysis: The economy of Scottish independence

• Scottish indepedence: Fiscal black hole

• Eddie Barnes: The £130 billion question on share of debt