Tuesday 9 September 2014

Is a currency union with fUK worth £126 Billion?

Bear with me folks, I'm just thinking aloud. Address it as such.

UK debt is £1.4Tn; the cost of servicing that is £50Bn per year.

Scotland's population share of the debt - if we do the deal that seems to be proposed, of a population share of debt in return for a population share of assets, with the pound Sterling explicitly counted as an asset - is £126Bn. So if we got the same interest rate as the UK gets now, our servicing cost would be £4.5Bn per year, but we'd probably get less good terms so it would be a bit higher - say £5Bn.

Suppose we don't do the deal. Suppose we walk away from the debt. Everyone says we can't do that because the international banks wouldn't lend to us. But, actually, do we need them to?

Scotland's share of the deficit is quoted as £8Bn. Less debt servicing - which we wouldn't have to do because we wouldn't have debt - it's £3Bn. Less the cost of Trident (our share is £2Bn per year), it's £1Bn. Less the cost of overseas military adventures... I don't think Scotland would actually have much of a deficit at all.

So: suppose Scotland actually has no deficit, we don't need to borrow anything from the international banks, so what interest rate they would charge us is purely academic. And suppose in twenty-five years we did need to borrow, by that time we'd have a reasonably good credit rating.

But suppose Scotland does still have a small deficit - say £2Bn a year. Suppose also that the banks charge us four times as much as they currently charge the UK. Then it would take us until 2031 before our deficit hit the £8Bn, which, if we did have an agreement, it would be from day one. And in that time we'd have saved £75Bn.

Suppose we'd made no useful investments, received no interest payments on that saved money, and nothing else had changed, and everything continued as before, it would be 2039 before that £75Bn cushion was exhausted. And if we'd serviced a debt successfully for twenty-three years, we would, inevitably, have earned a reasonable credit rating - perhaps not AAA, but not none. So our interest payments would slacken off.

I'm not saying we should do this. But I honestly don't see that exchanging a currency union for a population share of debt is a good deal for Scotland. Sooner or later we will need a new currency anyway, firstly because Sterling will collapse when the fUK leaves the EU, and secondly because our economy is systematically different from the fUK economy - we are net exporters of food, power and hydrocarbons, they are net importers of all three - so a currency managed for their benefit isn't going to suit us for long. Sooner or later, we need out own currency. And in the short term, no-one denies that Sterlingisation will work.

So I think that we should be robust in our negotiations with fUK, because actually I believe that walking away from the debt is not such a big deal as it's being presented.

Remember: the debt is not Scotland's debt, Scotland is not the nation that contracted it and the nation that did contract it will still exist. If we have clearly and publicly volunteered to take on a fair share of that debt in return for a fair share of assets (including the currency, which is an asset), and that share of assets has been refused, walking away from the debt is not defaulting. The banks may be a bit sniffy about it; we may get our credit rating marked down a bit. But we won't be junk status.

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