John S Warren, who comments here often, had this post on Bella Caledonia last week, and I thought I would share it here given its relevance to current debates:
“Scotland will be liberated by debt if it becomes independent” — Richard Murphy.
Scottish independence requires the problem of currency to be addressed and solved. This the most critical matter of all. The SNP in 2014 wanted to share the currency (£ sterling) with the UK but the British Government blocked this, for reasons I will discuss below. It was a mistake to propose sharing the currency in 2014, because it meant Scotland would not be independent. Control of currency is control of the purse strings, and that is a more decisive control over a country than everyday politics. The current SNP position is now to move to a separate currency, but not immediately. This is also unsatisfactory, and for those who wish to explore why this is so I recommend reading Common Weal, and also Dr Tim Rideout who is an SNP member; for their extensive coverage of the matter. I also recommend Richard Murphy, who has just produced a short ten minute video lecture that explains the position, here:
I wish here only to explain where we actually stand now in Scotland, and what this implies.
The British State has already acknowledged that it was taking full responsibility for all the commitments associated with currency in the event of Scottish independence in 2014. In January, 2014 the Treasury made a statement on currency, post-independence: “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”.
This established the principle that rUK was the ‘continuing state' in international law, and that rUK was responsible for both the currency assets and liabilities. In February George Osborne, the Chancellor formally ruled out a currency Union with Scotland. In September 2014, Mark Carney, Governor of the Bank of England, confirmed that a currency union between an independent Scotland and rUK was “incompatible with sovereignty”. It had been made clear throughout that there was no qualification to the responsibility for debt that rUK was acquiring, related to the Scottish State taking a share of debt, and there is good reason for that. rUK did not wish to leave a scintilla of doubt in anyone's mind anywhere that the obligation rUK was carrying was conditional in any way, on anything Scotland did. The currency of rUK was going to continue to be the currency of a wholly free currency issuer. This was fundamental — they did not wait to negotiate it: it was too important, and too urgent.
There are three important points following from this.
1) Scotland has no responsibility for UK debts.
2) It is forgotten that the Treaty of Union in 1707 created a completely new Parliament for Britain (both the Scottish and English Parliaments were dissolved, but only the Edinburgh parliament actually ceased); this deliberate formality created what is technically described as an incorporating Union.
This has a precise meaning.
Strictly, the only way to break an incorporating Union is to dissolve it, not do what we would actually be doing — allowing the secession of Scotland from a union that is not in fact, strictly a federal union; but this is in order to ensure that there is a continuing an rUK that is also the ‘continuing state'; dissolution would be a world disaster. Why was it set up as an incorporating union? Because England hoped that it could bind Scotland forever in the Union. If they believed that they would not have proposed secession in 2014 (in fact the Union almost broke in Parliament shortly after the Union, in 1712. The Scots nearly left, and the Union was rescued in Parliament only by proxy votes).
The lesson is: nothing is forever. In that sense the whole operation now is a fiction — but nobody, not rUK, not Scotland not anyone can afford to follow the strict niceties devised by 18th century commissioners' rules. They are no longer viable in the modern world. We are doing the only thing that works. Scotland leaves, England takes the common assets and the liabilities that go with them. It also happens to follow the contemporary international precedents; the fairly standard boilerplate rules typically in use for seceding nations in international law. This is what works most efficiently and fairly in the modern world.
3) The important point about the 2014 British government statement is that rUK was also making a big, very revealing declaration about what was really important to it. Nobody asked Britain to make that statement.
It was not what Scotland proposed at the time. But rUK was not prepared even to negotiate with Scotland over the currency (£ sterling), in spite of the fact that Scotland is a joint owner of the currency. rUK just gratuitously asserted right of possession and full title.
In fact, Alex Salmond had proposed sharing the currency (a very bad judgement).
The assertion by rUK was not founded in right, but necessity. It was done because the currency was of vital importance to rUK, and it required and was utterly determined, to establish unvarnished sovereignty over the currency as its prime objective, and it understood that in taking title to itself without notice or negotiation, the price of taking the currency with no negotiation was that rUK would have to assert equal certain ownership of all the currency liabilities. The corollary of this is that Scotland becomes a currency user of its own currency, and therefore also requires to issue its own currency after independence, if it wishes to retain independence. rUK knows in this case they cannot have it every way; both have their cake and eat it; (of course everybody living in rUK thinks it is worthwhile to pile in and try to grab a free lunch as well by trying to pass off the liabilities to Scotland anyway as if this is a car boot sale), but we all know it won't wash.
The solution proposed by rUK in 2014 was vital to rUK, and it suits Scotland well, because independence is de facto defined by being a currency issuer, not a currency user; currency issuance is the defining feature of modern independence.
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Bookmarked into my ‘Independence’ armory of articles to produce in Twitter spats. Almost got a quiverful
Not commented for a while…. been sailing for a fortnight off the West Coast of Scotland. I have three observations from my trip.
First, sitting at anchor waiting for the wind and rain to subside whilst listening the UK news with “heatwave” as the lead story on each news bulletin has, perhaps, given me a brief incite into how the Scots feel about the remoteness and relevance of “UK” news!
Second, COVID compliance is much more closely observed in the areas I went ashore….and is an act of solidarity that is missing in England.
Third, when the sun shines Skye and surrounds are the probably the best sailing grounds on the planet.
Clive
I was in Snowdonia last week and 1 and 2 apply equally to Wales
I was not sailing – slate quarries were my destinations, high in the more remote Snowdonia valleys – and they were pretty amazing
Good for the soul, exercise and time with my younger son who has caught my enthusiasm fir industrial archeology
Richard
No stiff rock boots then?
“Dawes of perception” would be an excellent ascent to log in keeping with this blog, although, I admit, well beyond the capabilities of the vast majority of even reasonably accomplished rock climbers ;).
Maybe “comes the dervish” could be an easier option?
I know my limits… good boots, steady walking, steep owths are fine, real climbing avoided
Clive, viz-a-viz your observation on “UK News” in Scotland, here’s an explanation of how the News works in Scotland:
https://youtu.be/edrBBphznfw
I hear your points on the need for a new currency and existing outstanding (GBP)…. but I fear that it is not so simple.
First, I was under the impression that the 2014 statement saying that rUK would assume responsibility for all UK debt in existence at the time of independence was a “backstop” to reassure the gilt market. Surely it would be part of a (pretty rancorous) negotiation…. but I DO entirely accept that Scotland (in a “no deal” exit) would not be liable for any UK gilt debt.
Second, I am still unhappy with the details of new Scottish currency creation – particularly the issues of asset/liability mismatches in the financial system. The Reserve Bank of Scotland website deals with creation of the new currency but I can’t see any satisfactory strategy for dealing with existing liabilities.
For example, a Scottish worker will now have salary paid in Scottish currency. Clearly, if they have a mortgage this must (at the worker’s option) also be converted to Scottish pounds….. but the bank that lent will not have that option to convert and that will create an unacceptable FX mismatch that will produce substantial selling pressure against the new Scottish currency.
Any plan MUST address this issue. It was addressed by the Czech and Slovak Republics in the early 90s with reasonable success but the far greater “financialisation” of the modern UK economy will present bigger problems.
Clive
We have to disagree. I have already said why.
1) Scotland cannot be liable for repaying rUK debt when net rUK is nit repaying it
2) It can be expected to make an interest rate contribution but only at current long term replacement cost i.e. maybe 0.6%
And re mortgages etc, the accepted law on this is quite clear and restatement by Scottish creditors into Scottish pounds would be at their option and banks could not object. This is simply not an issue. There are many precedents. The euro is one, of course. You note others
Richard
You are wrong here.
1. UK is repaying debt all the time. It is also borrowing all the time. You are looking at the total debt stock, and saying because it isn’t reducing, none is being repaid.
This leads you to the fallacy that Scotland isn’t liable for any UK debt. Even though the UK as a whole is borrowing on behalf of Scotland and repaying on behalf of Scotland all the time. You seem to think the borrowing on behalf of bit doesn’t matter because the total debt stock is static. Joke accounting.
In reality, Scotland would be assigned a portion of the UK debt stock and then things would continue as before. I.e. Scotland could borrow to repay their liabilities, including the portion of debt they inherit.
What would most definitely not happen is that Scotland can wash it’s hands of all liabilities in the manner you suggest. Especially when you claim it could keep it’s portion of the assets as well.
2. This point would become immaterial, had you not got point 1 so wrong. It would simply be paying interest on the debt stock it inherited, at whatever rates they might be at.
3. The mortgage lender has the only right to convert a mortgage into a different currency. The chances are most would choose to keep them in UK GBP, not some new Scottish currency which has little backing. This might change over time but the mortgage lender itself will have borrowed in UK GBP to cover, and few would want such a huge mismatch in their asset/liability matching portfolios by choice.
The Euro situation was different, as the old EU currencies ceased to exist, ad were transferred into EUR at a specified rate on day 1. A new currency is the opposite of this situation, and the banks and mortgage lenders aren’t forced to do anything for existing loans.
Here we go again….
I am not wrong here
For heaven’s sake stop your small-minded thinking. The discussion between Scotland and rUK will be an international negotiation, and not some minor debt refinancing issue. The view taken will be at a macro, and not micro level, and from that perspective everything you say is complete nonsense. The negotiation will be about overall debt, not the rolling over a particular elements of it to simply reprofiled debt to suit current interest and term requirements of markets. I am not talking joke accounting: I am dealing with the real world in which these negotiations will take place, and you are the jokester. As I have previously suggested, the legal principle involved will be that of a compensation payment, and since they rUK does not repay its debt Scotland will owe no compensation for its cost of doing so. Read other comments which amplify my point.
You are also wrong about currency conversion.m Read Tim Rideout. I know you Unionists like to live in your fantasy world, but on this occasion you want to check out some reality
Sorry, I thought I was clear – I DO accept what you say on the debt issue. Legally, Scotland has no requirement to bear ANY of it and a “fair” settlement should be zero or (at worst) small. But I fear that the rUK government will muddy the waters on this (for an English Nationalist audience if nothing else) and it will be a major bone of contention.
This then feeds into the monetary separation where considerable goodwill is required to make it run smoothly….. goodwill that might be in short supply if the current protagonists remain in place.
I am afraid it is NOT the same as the creation of the EUR where legacy currencies contracts were ALL redenominated into EUR. It is more akin to a country that chooses to pull out of the EUR and that is FAR more problematic (which is why it has not happened).
Sure, it is clear what happens to the “man in the street” in Scotland…… but the FX mismatches MUST be carried somewhere and that will be in the banking system or by governments. In practice, it will have be a combination of both….. and that will almost certainly require the BoE (rUK Government) to take some of this risk. Will they?
CZK SKK is probably the only recent relevant model but they were economies without huge financial assets and liabilities, both sides were moderately friendly and had support from neighbours keen to ensure success in an ex- “iron curtain” country. Even so, SKK went quickly to a big discount. I can’t remember all the detail of the arrangements but it must be worth the SNP talking to the players involved at the time.
i am not saying it can’t be done in Scotland but I do not see anyone addressing these crucial issues.
I agree that all the thinking is happening on the fringes….like here
And with Tim
See his comment…
My last comment has been superseded by Mr Parry’s last comment and is now redundant. I misunderstood. On the technical banking details I do not feel such mechanisms can possibly be insurmountable, provided there is basic goodwill, and there is not a concerted effort to undermine Scotland.
Ed,
No, you are completely wrong. This isn’t a mortgage. It isn’t a household budget. This is secession. Different rules apply. Different conventions operate. Different precedents are set. Scotland has no obligation whatsoever to pay the debt. None. No ambiguity, no equivocation. You are just plain wrong. Your head is buried in the sand. If Scotland had to accept debt to secede it would be no better than a scam by rUK. It will not happen.
The negotiation between England and Scotland will be on a macro level, and will be about overall debt and assets. That is all you have correct here.
The legal principals you have totally wrong though. The UK does repay it’s debt, though you seem to willfully misunderstand this. Simply put, Scotland will inherit a share of that debt, and will be liable for it in it’s entirety.
What you are doing is essentially claiming that new debt raised for the benefit of the UK as a whole is England’s liability, but the assets generated from raising that debt should be shared. By the same logic, maybe the UK should claim back all the the payments made via the Barnett formula? After all, only Scotland benefited from them but the rest of the UK supplied most of the money.
But, I am sure you can point me to the legal principle you are referring to, rather than just making them up to suit your argument.
You are also quite wrong, as is Tim Rideout regarding the currency conversion. Mortgage contracts are written such that they are stated in a single currency. Banks are under no obligation to suddenly convert these to another currency. Given those contracts are written under UK law, not Scottish law, it would be the UK courts which would be the arbiter of any decision. Moreover, they would be incredibly unwilling to do so as it would mean they would have a huge mismatch between their assets (now in Scottish currency) and their liabilities, so would only do the conversion if compensated to do so – which means a significant increase in the cost of those mortgages.
Time Rideout makes a number of large errors in his post. New legislation does not override current contractual obligations, so that idea is a non-starter. You can’t arbitrarily convert mortgages or bank accounts to a new currency without the approval of both parties. As is trying to force banks to register with the Scottish reserve bank – many firms will simply withdraw from business in Scotland if this is the case rather than be forced to convert their current contracts with no compensation for the massively increased risk. Having personally dealt with many of the banks on this particular issue I can tell you that all the major ones would headquarter in the UK, and move from Scotland. This exodus would lead to a flood if those banks were forced to convert their assets from a stable reserve currency to a brand new currency which has little internal demand, no international demand at all and is supported by a very small country with poor economic fundamentals.
You can make things up as much as you wish, but simply stating these myths doesn’t make them any less mythical.
Personally, I am all for Scotland becoming independent. If nothing else it would mean the SNP would have to start accounting for their own failures, rather than trying to pin everything on Westminster, and it would also give us ample opportunity for the claims many people such as yourself and Tim Rideout are making. If those claims turn out to be totally false, of course you will likely try and absolve yourself of any and all criticism, I am sure, and it will be the people of Scotland who find out the hard way – as you aren’t going to lose anything by making up these fantastic claims.
With respect, I have answered the questions on debt already
And the rest of this is Unionist fear no gearing and simply nit what will happen, not least because Scottish law would then apply, try as you might to claim otherwise
You might want to check your facts Richard. Your “legal principles” are most certainly wrong. I’d love to know where you got them.
For your guide, the governing law would be the Vienna Conventions of Succession of States.
Which state very clearly:
“When part of the territory of a state is transferred by that state to another state, the passing of the state debt of the predecessor state to the successor state is to be settled by agreement between them.”
“In the absence of such an agreement, the state debt of the predecessor state shall pass to the successor State in an equitable proportion…”
Might want to have some experience in international law before you start commentating on it in the future.
What I have said is exactly consistent with that
There is only one successor state here
And I have laid out the only sensible basis for agreement and have stared the reason why
I fully appreciate the requirements of the Convention and have offered a wholly reasonable basis for agreement
And nothing requires repayment
The problem is yours here, not mine
Try reading what it says
Ed, regards your point 3 a mortgage lender has no right to convert a mortgage into a different currency. They could only do that in agreement with the borrower. The only body that does have the right to determine the currency of contracts is the state. The Lex Monetae is a very ancient principle that goes back into the mists of time. States can and do effect such changes, such as Estonia in June 1992 replacing the Rouble with a new currency. All Estonian contracts automatically converted to that currency without any issues or complications. Exactly the same thing happened for all the former USSR republics except for the Russian Federation which as the ‘continuing state’ too the Rouble currency, the National Debt, all the USSR international assets and obligations, the UN seat (but not the Ukraine UN seat – I don’t think many folk know that Stalin insisted on and got two UN seats – one for Russia and one for Ukraine – so he had the same two votes as the UK + USA), etc. When South Africa replaced the pound with the rand in February 1961 do you think anyone in South Africa had a choice about whether to use the rand or not?
You should also note that there is no such thing as ‘United Kingdom Law’. There is English law and Scottish law. The Treaty of Union provided that Scotland would keep an entirely separate legal system in perpetuity, and it has done so. If you choose to examine any of your own contracts you will probably find that there is a clause to the effect that ‘This contract is subject to the jurisdiction of English Law except where one of the contracting parties is domiciled in Scotland, in which case the contract is subject to the jurisdiction of Scottish Law’.
I once had a contract nullified because it was written under the laws of the United Kingdom
It was a long story, but it cost one of the parties $50 million to reopen negotiation for one of the parties
Ignore this at your peril, I suggest
Dear Clive, it actually is all pretty simple. The UK is the Continuing State so it gets the assets and liabilities except what is in Scotland. So that leaves not a lot to negotiate other than the technicalities of handing over the tax and benefit records. So far as us in Scotland are concerned then the Lex Monetae applies. The legislation introducing the new currency will provide that all legal contracts, etc where both parties are domiciled in Scotland will be in the currency of the state as of Currency Day. The only exception would be if all parties agree that a contract should remain in Sterling. Obviously that leaves an issue where one party is not Scottish, for example a mortgage with Nationwide. However, all financial institutions that wish to operate in Scotland will be required to set up a Scottish subsidiary (e.g. Nationwide (Scotland) Plc) and will need to register with the Scottish Reserve Bank. In order to register they will have to agree to change their Scottish contracts into the new currency (unless as above). There will, therefore, only be an issue for the typical punter if they have a product from a company that decides to withdraw from doing new business in Scotland.
There are some products / contracts that will remain in Sterling, for example things involving shares such as a Stocks & Shares ISA since the stock market remains in London and the prices are all quoted in sterling.
You should also note that in terms of exchanging sterling into S£ the Scottish Reserve Bank will not accept ‘negative money’, by which I mean anything in debit such as an overdraft, personal loan or credit card debt. So if you have a £500 overdraft on Currency Day then your bank will need to give you a matching S£500 overdraft and take that S£500 and use it to clear the £500 sterling debt on your old account. The fact there is a small flow of new S£ that need to be converted to sterling can be dealt with by the banks internally as it will just slightly reduce the amount of new S£ they need to buy from the Scottish Reserve Bank when converting their customers credit balances into S£. For loan accounts such as a personal loan, business loan, (i.e. which have a sort code / account number attached) then the old account will need to be closed and a new one opened with a Scottish sort code / account number with the outstanding balance simply moved across. Credit cards may or may not need a new card number / account depending on whether those 16 digit numbers indicate the currency / country of the card issuer.
Hi,
Thanks for the reply. Let’s consider a Scottish bank that has a portfolio of loans to Scottish people and companies. This will be partially financed by deposits taken from Scots but also from bonds issued in the bond market.
There will be some Scottish depositors who will not want redenomination into S£ who will, in the run up to the creation of the S£, take their cash out and deposit with an English bank. Yes, it could also go the other way…. but you need to be ready for that deposit run on Scottish based banks. Yes, the bank run could be stemmed by Reserve Bank of Scotland lending of last resort but there are issues of “what collateral?” etc. And do you want the birth of a new currency to be associated with a banking crisis? A plan needs to consider this risk (in terms of bank solvency/liquidity, interest rate policy and FX policy)
Also, what happens to bonds issued in GBP by the Scottish bank that will almost certainly have been issued under English law. Will they be redenominated? If markets get a whiff of compulsory redenomination then the Scottish bank will loose access to bond market finance before Independence even happens. If there is no redenomination how will the Scottish bank manage the FX risk? Either way, the Scottish bank will be in peril.
Perhaps more realistically we should look at large cross border banks like Lloyd’s/Bank of Scotland where BoS becomes Lloyds Scottish subsidiary.
I don’t think it is reasonable for current Lloyds/BoS bondholders to be repaid in a mix of S£ and £. Lloyds/BoS will have to bear that risk. How big is that risk? Well, rUK regulators will demand a “worst case” analysis and “back of an envelop” sums might suggest a loss of 10% or their core capital. This would be a problem.
Even if you can handle the commercial flows there will be huge speculative flows that will exacerbate the situation.
You say “Clive, it actually is all pretty simple”…… but I am afraid it is not.
I will leave Tim to some of this
But some questions:
A) Why ill the Scottish bank have taken out GBP loans?
B) WHy can’t the Scottish bank offer GBP deposits?
C) How big is that FX risk, really?
Richard
Firstly Clive, there is exchange of money and redenomination of contracts. So existing sterling may be exchanged into S£, legal documents will be redenominated. Most of your concerns are not real. It sounds like you are assuming some sort of compulsion when that is not the case. I have always been very clear that it is entirely voluntary for people to exchange their sterling into S£. Nobody has to take an S£ bank account if they don’t want one and everyone can keep a sterling bank account, sterling credit card, etc if they so wish. Thus any bank in Scotland will offer (and maintain) sterling accounts as well as new S£ accounts. I anticipate as much as 60% of the £100 billion or so of sterling in Scotland will remain in sterling on Day 1 of the S£. There is thus no need for anyone to move any money anywhere, and certainly not as a rush out of Scotland.
As you say the Bank of Scotland (and Royal Bank of Scotland) would likely be the Scottish subsidiaries of Lloyds (and Natwest Group) and they will have to get a banking licence from the Scottish Reserve Bank. If they have sold sterling bonds under Scottish law (which they probably haven’t) then those banks would have a choice to change them to S£ or leave as sterling. If sold under English law via the London markets then they would stay sterling unless all parties agreed otherwise. In terms of a ‘run on bonds’ then so what? There won’t be, but any such run is in the secondary market and has no effect on the issuer. Going forward these now properly Scottish banks would be highly unlikely to want or need any sterling bond issuance. Their financing will need to be S£ as their customers gradually exchange the rest of their sterling holdings. Nobody who currently owns a sterling bank bond is going to get repaid a mixture of currencies.
Where do you see these big flows? Those folk that want S£ will ask their bank to buy them for them from the SRB, those that don’t stay as they are. ScotGov (and all official bodies) start using the S£ only and tax must be paid in S£ only. Other than that shops etc can accept both currencies if they wish. For a short period the rate will be pegged at one to one with no FX charges, but after a month or two that will end and the S£ will float. International markets will have zero S£ which makes it kind of difficult to either play the FX market or be a lender to ScotGov. Yes I know you can do short selling, but a) you need a buyer and b) the SRB will have huge FX reserves (all our sterling) so pretty easy to close a bear trap if it wants to do so.
If rUK makes it difficult for Scotland to negotiate with (although I think in the end, rUK will be ‘grown-up’), I doubt if international law will be on the side of rUK in this matter. rUK needs a good, amicable deal out of the negotiations, because it has a lot at stake after Scotland leaves. Scotland’s position, once it is accepted Scotland is leaving, is quietly quite strong; there is quite a lot rUK has at stake, which needs accommodation from Scotland, from trade, through utilities, to defence. rUK needs a smooth deal that isn’t acrimonious, for the international, geopolitical optics alone. It needs a fair deal for everyone, that works. In addition rUK needs a lot more out of it. All Scotland needs is a fair trade deal, not an attempt to deliver gratuitous punishment; and to be able to join the EU, as its choice alone.
rUK wants ‘freedom’; freedom to control the currency, and it hasn’t negotiated this with Scotland. It has just asserted ownership. That is fine, but it isn’t pick-n-mix. The debt follows the currency, and here we should see the currency itself as the ‘asset’ to which the liabilities are inextricably tied. If Scotland does not wish to be dependent on the rUK forever it is obliged to issue its own currency. rUK has already refused Scotland joint sovereignty over the currency, and just asserted its entitlement. Asking Scotland to lose its currency of the last 300 years, but accept responsibility for the debt liability, actually means Scotland has to take responsibility for debt in a currency that is no longer its own, and over which it has no rights of control whatsoever; or it must issue its own currency; but expecting Scotland to do both (issue its own currency and take responsibility for debt in another currency), which is where the rUK position implicitly leaves Scotland, is obviously unacceptable and unsustainable: it would reduce Scotland to a monetary slave state of rUK, possibly in perpetuity, and it is only put forward as an argument by Unionists, to make independence look a great deal more difficult and unattractive than it is.
rUK wants to retain its seat in the Security Council of the UN. It wants its independent deterrent. It wants to be a power broker in the IMF, G8, and so on. It cannot just take everything, and dump some unwanted debt on Scotland because it thinks it can bully its way to have everything for nothing. The world knows rUK is weakened by Scotland leaving the Union. rUK will need a good, clean negotiated deal; a fair one, if it going to hold on to all the things it wants. rUK will have to negotiate sensibly.
I take your point about the mechanics, and the possible mismatches; but this is a very sophisticated country in the finance sector. What you point to is ‘mechanics’. It requires detailed solutions, formal procedures to be planned and prepared. We require of insiders in banking to be more candid about the solutions, and stop fighting a rearguard action against change that is coming. This is about the motivation of professionals. It is not a really challenging task in science, at the edge of the unknown, to solve these minor technical problems; like the real difficulty of finding a viable COVID-19 vaccine. It just needs bankers to do their job, for once for the common good. There is nothing there that should not be comfortably surmountable without unfathomable difficulty.
In 1707 the Scots mathematician David Gregory (1659-1708), then at Oxford University, was asked by the Commissioners of Union during the negotiations, to solve their technical problem. How to compensate Scotland for taking a share of England’s debt burden. People think that the dreadful state of Scotland’s economy at the time meant it was ‘bust’. It wasn’t bust, just poor. It actually had no debt. Gregory produced a formula, that became ‘the Equivalent’; It was paid partly in specie, carried up to Edinburgh in chests, with a large armed escort. Part of it even ended up as a contribution to the seed capital of the Royal Bank of Scotland when it was founded in 1727. It really does not matter now whether Gregory did it well (I suspect not); it did the job. all we need now is the same rule for modern bankers: ‘mutatis mutandis’.
I agree with all this
The realpolitik is the UK will be in a weak negotiating position with Scotland – something Unionists have never been good at admitting, as we know
On International Law; how anxious people are glibly to pull an easy looking authority off the peg that fixes their problem, and that they can wave vacuously in the air. Neither VCSS 1978, or VCSS 1983 have been widely ratified. They do not have the authority you claim.
State succession is governed as a matter of fact by customary international law. That means agreement is is expected by both parties. rUK does not unilaterally decide the outcomes. rUK is the continuator state (Scotland will not in principle demur) and has so far established comprehensive control over the currency Scotland currently both uses and has been part owner; that decision by rUK unilaterally, without any attmept to dfiscuss the matter, will require Scotland to become a currency issuer in order to prevent it becoming a monetary slave state of rUK. The idea that dumping the debt of a (now) foreign currency debt as a permanent burden on Scotland as well, is not defensibly equitable; especially as rUK has in effect already announced it has unilaterally acquired all the responsibilities for the total debt (although rUK does not exist). There is no case for Scotland taking the debt.
As contunuator state, when the time comes rUK will require to be more prudent and wise in its negotiations with Scotland than its apologists here have been capable of showing.
I agree with you John
Do you have data in adoption of the Vienna Conventions? I happen to think what is being suggested is compliant, anyway
I am in a rush today so this is very short; the Badinter Commission (BC) was set up 1991(?) and its Opinions (over Yugoslavia – FRY and SFRY) have been influential. But there is no “Code” for this (one lawyer, Arman Savarian has written of codification as a “futile endeavour”). BC produced a series of Opinions on various aspects of succession and continuation. On Scotland/UK/rUK, the distinguished academic Public Law experts Boyle and Crawford have written on Scotland and rUK, but what I read was an erudite discussion, simply to establish at length that rUK would be the continuator state. We can now, I think confirm that. Progress?
Sorry, must go.
Thanks
I totally agree. Do please also note that the SNP members, via the branch delegates that attended the April 2019 SNP Conference were very clear when they voted that “an SNP Government should take the steps necessary to enable the Scottish Parliament to authorise the preparation of a Scottish Currency AS SOON AS PRACTICABLE after a vote for Independence with the aim that the currency be ready for introduction AS SOON AS PRACTICABLE after Independence Day’.
Only the SNP leadership and Andrew Wilson think that ‘as soon as practicable’ means 10-15 years. For everyone else it is a month or two. Note also this is NOT subject to any tests. We are only supposed to be ‘guided by the 6 ‘tests”, and I think we are all indeed very guided to put them and the rest of the No Growth Commission report in the bucket.
Everyone saying ‘we need to settle the currency question’ is, therefore, wrong. We already have and the official SNP policy is to have our own asap. So the question is not to settle the currency question but simply to get the leadership to accept the official policy of the Party. I think that will be helped if everyone accepts and public states that we have decided. In due course there will then be a handful at the top who will be isolated and sooner or later they will have no choice but to accept the settled will of the YES movement and the SNP membership.
Fair points Tim
Can I flag you to Clive Parry’s comment, coming soon?
Well said Tim. And I think you should keep shouting this from the rooftops – many of my relatively recent comments regarding economic matters has involved me having to emphasise that SNP party policy is for a new currency nearly immediately on independence, few people seem to realise – the leadership are blindly and, I think, consciously ignoring this – and then people don’t speak out believing that that leadership ‘knows best’.
There is nothing on it on the SNP website – the last I looked – but then, there is barely a mention of independence except as a ‘nice to have’ undertone on that website – the place most people would go to first if they were considering changing their mind. And they were happy to airbrush out a prominent SNP figure from their history section recently, so it’s not like the website is never updated.
Sorry, that turned into a moan, but it can be so frustrating at times, and the leadership should NOT be allowed to dodge this one just because it doesn’t suit their neoliberal ideals. How to get them to stop dodging? I have no idea! Anything and all things to increase the profile of it being *actual* SNP policy would be good for a start,,,
Isn’t it Scottish policy to seek membership of the EU a.s.a.p. and also EU policy for new members to adopt the Euro?
I see no chance that Scotland would want to join the euro
It has to have its own currency first anyway
And the EU requires a commitment to join, without a date attached, and there are several precedents for no action following
So there is no euro compulsion in reality
The outcome following Scotland’s leaving the UK would be a negotiated settlement. Any proclaimed red lines would turn out to be opening positions only. The parties would end up agreeing to something, because to do otherwise would be very bad for both of them.
As the article says, it would be rUK that would keep the existing debt as actually issued, not least because it would insist on doing so to ensure no spooking of credit agencies and international holders. That doesn’t mean, however, that Scotland would be allowed to walk away from any liability and, for its own market credibility, it shouldn’t attempt to. Like it or lump it, the debt was created on behalf of the existing UK as whole.
Equally, though, Scotland would require a share of the assets of the UK. That’s not just anything physically located in Scotland, but a share of those things that are meant to be for the good of all
of the UK (and paid for by Scots as well as the others). The military capability, the overseas infrastructure and organisation, the British Museum etc, etc.
And that’s what the haggling would be all about. You cannot take 8.5% of an aircraft carrier or the like. Scotland doesn’t want any part of Trident in any case. rUk could not replicate in a hurry the submarine bases on the Firth of Clyde, which means there’d need to be some leasing arrangement for a period. An independent Scotland may choose to challenge the egregious shift in the sea border that Blair sneaked in just before Devolution took place, at least to the extent of seeking compensation for it. And so on.
My hope would be that Scotland would come out of such negotiations without any initial debt liability at all. The important point is that it would do so by agreement. No “pariah state” label resulting from reneging on a debt obligation.
Any other outcome would take us straight into the currency question. Debt service is one thing if the liability is denominated in your domestic currency; it’s quite another if you’re making external payments with a currency risk added to them. That may have been part of Salmond’s thinking going into 2014, arguing for preserving a “currency union” (and not just sterlingisation).
But I think the more important factor for Salmond was a political one, which was to do with trying to defuse people’s worries about the security of their money, including savings and pensions. Just as his sales pitch included keeping the Queen and the BBC, he was peddling a “no impact on your money” position. It didn’t work.
Those concerns about security still exist. Technical arguments aren’t going to make them go away. People may have completely misunderstood, for example, how state pensions would be funded after independence, but you won’t get anywhere with simply dismissing their fears on that subject. You have to sell them a story.
The message that an independent Scotland could operate just fine with its own currency hasn’t got through, despite what activists may imagine. That story is still unsold.
We know the story is unsold
But the idea that the issue runs as you suggest is, I think, wrong
As a matter of fact the U.K. does not repay its debt. It does roll it over, for sure. But it does not repay it. So, why should Scotland compensate England for something it does not do? Please explain.
There is no doubt interest may fairly be due, but not the debt itself.
If rUk keeps hold of all of the debt as originally issued – rather than having a division of this into separate allocations for each party – then any debt assigned to Scotland would be in the form of an IOU to rUK with repayment terms attached to that.
All to be negotiated, of course, but is it likely that those terms would require repayment (beyond interest) to be made only if rUk were actually paying off the original? Doing that would require a mechanism of explicit linkages between elements/tranches of the two debt books.
I’d prefer to exit the negotiations with no debt owing at all and thereby avoid the issue arising in the first place.
I have never said there should be no repayment options attached: I have said that the repayment option must reflect the overall repayment profile that the UK has, and they are not repaying debt
Comments of this kind are frequently made; a division of assets and liabilities is proposed. This is quasi-dissolution. It is not the method used when states actually secede. It will not happen here; it is a recipe to create a quagmire in which the whole thing simply drowns in pointless complexity. Secession, as distinct from dissolution has different rules. Scotland departing the Union and the currency requires a category change in the way people think. This is a vague intuition people seem to have, like ‘household budget’ government financing. It is nothing to do with the real world.
The story has not been sold, because save for Richard and Common Weal, nobody is carrying the narrative. It is only beginning to be addressed, but although the message still needs pushed, the windo of opportunity is now opening. It is no surprise people struggle with it. Think of MMT, and its history. Nevertheless I think people are more receptive, because they cannot fail to see that the tenets of neoliberalism and the certain perfection of market forces is literally collapsing in front of their eyes.
It is fairly bizarre that it falls to a fairly small group of thinkers, of whom I seem to be one, to take this issue forward when it is so important for Scotland
You just don’t want to go there! We do not need or want any share of UK assets other than what is in Scotland. As soon as you start asking for assets you will get the liabilities (National Debt, pensions) as well, and I think the liabilities are considerably bigger than the assets (I am excluding ‘notional’ assets such as roads, railways and the like which are not moveable or realisable). On the UK assets side of things there is the foreign territories, bases, embassies and other property, military hardware, the UK net foreign reserves (US$55 billion), and museum artworks. On the liabilities side you have £1.4 trillion for the National Debt and around £4 trillion for the State Pension and civil service pensions. Why do you want anything to do with any of that?
Whatever Blair thought he was doing in the North Sea is irrelevant. The UN Law of the Sea defines international nautical boundaries as the median line.
We don’t have a debt obligation so we can’t renege on it. Every bond sold quite clearly states it is issued by the UK and repayable by the UK. Scotland does not come into it and it is very clear, therefore, that it is a UK contract. The only way any of this would change would be if you declared the UK to be at an end and dissolved the country to leave England and Scotland as two new states. In that case only would you have to decide who gets what, but that will never happen as the UN Security Council seat would be declared vacant and be allocated to another country.
“We don’t have a debt obligation so we can’t renege on it.”
That neatly and trenchantly describes reality. Too many Unionists imagine a state of affairs that simply does not exist. Refusing to acknowledge that Scotland has no debt obligation to England isn’t going to change the facts. It hasn’t: period.
Precisely
Shoot me down in flames for overstating this, but, there may be those in their vintage years who are emotionally/tribally/fearfully attached the the £. It’s a comfort blanket, a status symbol few politicians would advertise an intention to remove.
And they would be a disproportionately loud minority well amplified by an Indy-hostile press.
Maybe
I’m happy to be described as vintage but have no attachment, emotional or otherwise, to the £.
Sadly I recognise from the polling evidence that many of my vintage, and a bit younger, wish to remain with what I’d describe as a dysfunctional UK – I see no comfort blanket in that.
SNP politicians have actually advertised their intention to remove “the comfort blanket” of the £, just too slowly and with crazy conditions attached. See Tim Rideout’s post above for the current reality. Tim’s plan for moving more swiftly to a new Scottish currency has been presented and well received at many SNP branch meetings.
I can remember when The Republic if Ireland used the pound, then changed to the Punt, and until the 1960’s both Australia & New Zealand used the pound.
How did that work?
I agree, that needs research
I would be interested in the results of any research too – I suspect that it might have been detrimental for the countries still using the pound – and even when Ireland adopted the punt there was still a lot of free use of the GBP (I mind that my dad would decide what currency to use while working in Ireland – in the 70s – based purely on the exchange rate, and there were never issues). I remember that Ireland always used to feel like it was ’20 years behind’ – I believe now that it was because they were always held back economically by the too-gradual separation from the British currency. They certainly aren’t behind in any sense now, so at some point from the 80s to now they’ve done a very fast catch-up. These are all ‘feelz’ stuff, it would be nice to know if they had any basis in fact!
Yes it does need research. I was not around for the creation of AUD, NZD or IEP.
My understanding is that the IEP ran in parallel with GBP for almost 50 years but they were separate currencies so that when the link with GBP was broken there were no legacy contracts where the denomination of the currency was in doubt. I am not sure that Scotland would want this approach.
No doubt there were considerable costs associated with preserving the link between IEP and GBP but exchange controls, credit controls and a much smaller financial sector probably made it easier then than a similar operation now.
My point is that Scotland must draw lessons (and recognize differences) from IEP/GBP, NZD or AUD/GBP and SKK/CZK and come up with solutions to problems. It can be done but political campaigners can’t pretend the problems don’t exist or that it is an exercise with only upside and do downsides. To do so might smack of “boosterism”.
There is an issue
I am more than willing to look at it
But I am nit convinced in this occasion by your analysis
I will come back on your other comment as soon as I can today….other issues are pressing
“political campaigners can’t pretend the problems don’t exist or that it is an exercise with only upside”
Mr Parry clearly thinks your idealism is heading for a brick wall.. is that with the majority of the Scottish nation behind you or just John D Warren and a few more naive diehards?
Actually, I’m doping hard-headed realism. It’s Unionists doing idealism and Clive, is fairly, worrying about who picks up the risk in a sector he works in
But as usual I am standing back and looking at the big picture and seeing that the political reality is as I think I am suggesting it
The former Scottish Office chief statistician, Jim Cuthbert, has calculated a figure of £100 billion pounds as a conservative estimate of the sum due for squandering our energy resource potential that Scotland should be claiming from Westminster.
https://www.thenational.scot/news/17507589.ex-scottish-office-chief-statistician-says-scots-should-be-paid-back-for-oil-revenues/
The circumstances in which leading politicians of Westminster based parties knowingly engaged over several decades in active deceit about the known and government estimated value of oil and gas resources in Scottish waters would, if carried out by any commercial enterprise amount to fraud. A position put forward by Scottish Government at the time of the 2014 referendum was that Scotland’s historic record of massively over-contributing to UK economy should be taken into full account in any independence negotiations on debts and assets.
I drafted a short resolution addressing this issue (and setting out the position I believe we should take going into any independence negotiations) that was proposed for the SNP Spring Conference by Edinburgh Newington branch of SNP and subsequently supported by Edinburgh Southern Constituency Association. Spring Conference was postponed due to covid-19 but an online conference will probably take place in October.
The resolution’s concluding paragraph reads:
“Conference, therefore, proposes that as part of any future independence negotiations, we state that £100 billion or a comparable sum as a minimum net figure be taken into account in any discussion of assets and debts resulting in any subsequent “solidarity payments” between Scotland and UK. Said “solidarity payments” will be to the extent of this sum from Westminster to Scotland and only adjusted in consideration of sufficient assets or other advantages going to Scotland to offset the above amount.”
An electronic copy with a supporting statement can be sent to any SNP member who agrees with this resolution and would like to take it to his own branch to also consider supporting it by contacting me at: mike.j.wallace@blueyonder.co.uk
Thanks
I note that Alex Salmond former leader of the SNP changed his mind about Scotland having its own independent currency in 2014 and decided in favour of it.
https://sourcenews.scot/alex-salmond-voices-support-for-an-independent-scottish-currency/
I note that at the beginning of 2018 accusations of sexual misconduct against him went public of which he was subsequently cleared on the 23rd March 2020 at his trial:-
https://www.theguardian.com/uk-news/2018/aug/29/alex-salmond-resigns-from-snp-after-sexual-misconduct-claims
I note in September 2017, First Minister Nicola Sturgeon announced that Benny Higgins, a banker with a career at HBOS and Tesco Bank, would assist the Scottish Government in establishing a Scottish National Investment Bank for Scottish infrastructure investment. In 2019 he also became chairman of the Duke of Buccleuch’s estates company, managing the extensive portfolio of property and land owned by the family. (See Wikipedia)
I note that if Scotland had its own independent currency nothing would stop the Scottish government offering “not-for-profit” low interest house mortgage loans to Scottish citizens. This would undermine banks in Scotland where house mortgage loans make up 80% of their loan books.
I note that John S Warren has commented that a majority of SNP members have voted in favour of Scotland having its own independent currency.
I note that one of the main drivers of the American revolution was the shortage of British currency for trading in the new American colonies but the British refused to rectify this issue and tried to suppress these currencies:-
http://numismatics.org/a-history-of-american-currency/
Noted
I think the trickiest unresolved matter were Scotland to secure independence from rUk is which state entity will thereafter own the three different( but predictably very expensive) nuclear decommissioning and laid-?up liabilities from respectively 1) The Trident and hunter killer nuclear submarine berths at Holy Loch near Glasgow and Faslane opposite Edinburgh on the Firth of Forth; nominally these nuclear submarines were used to protect the whole of U.K. assets while operational;
2) The nuclear power plants at Hunterston, Dounreay, Torness and Chapel Cross, the first three civilian
/ commercial plants beneficial to the Scottish economy; the latter, a military production reactor, benefitting the U.K. national nuclear defence programme; and 3) the research nuclear reactors at Dounreay ( Vulcan, a military project) and at East Kilbride – a civilian academic research reactor.
Disentangling the ownership of liabilities between this legacy nuclear estate is tricky with lots of potential political pitfalls.
Dr Lowry, to bring you up to date, Chapelcross and Dounreay are both in an advanced stage of decommissioning:
https://en.wikipedia.org/wiki/Chapelcross_nuclear_power_station
https://en.wikipedia.org/wiki/Dounreay
Decommissioning is a very long-term process- best estimate at up to 160 years- so decommissioning is not in an advanced state in Scotland, whose reactors at Chapel Cross and Dounreay were built in the late 1950s. The cheaper, easier aspects may have been carried out, such as removal of the least radioactively contaminated outer buildings or uncontaminated cooling towers.Thus is the easy stuff The core buildings are different: they are highly radioactive. In the case of Dounreay they involve several semi-melted fuel pins following a significant operational nuclear core accident. Detailed work on these is always postponed way into the future, thus forwarding the exigencies and costs to several future generations. Do not be fooled by Panglossian atomic industry propaganda that decommissioning is mostly done. It isn’t.
Fair enough
And this is a rUK cost
…. to answer your three questions….
But some questions:
A) Why ill the Scottish bank have taken out GBP loans?
Today, ALL assets and liabilities are in GBP and will be until currency conversion. Once the independence referendum is announced but before the S£ is created who will lend to a Scottish Bank where the currency in which you get repaid is uncertain?
B) WHy can’t the Scottish bank offer GBP deposits?
It can. After currency creation it can do so (as it could with USD) – prior to currency creation is the issue. Lex Monetae says they will convert to S£. If want a deposit that will definitely repay in GBP then you must deposit with an English bank. (Look at what happened to Deutsche Bank’s Greek sub versus HQ in Germany in the EUR crisis).
C) How big is that FX risk, really?
For a bank operating mainly in Scotland it would probably not even get as far as the currency day. The rates it would have to pay to borrow would shoot up and put it out of business (without UK state support (yes UK as this is prior to independence)).
For a UK-wide bank lets assume 10% of its business is in Scotland and capital equal to 10% of assets. Also, assume all of it Scottish assets convert but only 50% of its liabilities (ie. Scottish deposits). This gives an FX exposure equal to 5% of its balance sheet. So a 20% move in the FX rate would wipe out 10% of its capital. You can argue with the numbers but this is the idea.
These numbers assume no speculative build ups….. which in the case of the EUR crisis reached (and remain at) about EUR 1 Trillion (!). That speculation effectively being taking money out of (or borrowing from ) Greek, Italian and Spanish banks and depositing with German banks.
Clearly, S£ and EUR are not the same…… but those attempting this process MUST be alive to how financial markets and banks operate.
Of course, creating the S£ can be done but in the 21st century, highly financialised UK economy it will require co-operation from rUK government. Prior to the referendum, Unionists will scream that they will withhold co-operation…… I just hope that when Independence is won that wiser heads will prevail in rUK.
Clive
Why do you assume that the s£ will trade at a discount to the rUK£?
The question is a serious one
Richard
Clive, I have said it already but from this post you are still assuming there is compulsion. Thus folk will switch on the telly one morning and find all their sterling was confiscated at midnight and replaced by the S£. That is just not how the plan works. It is entirely voluntary and it will be stressed during the whole 2 year or so transition period before Independence Day that if you want S£ you will have to ask for them. The ‘do nothing’ position is that everything you have stays as it is in sterling with a sterling debit card, etc. So there is absolutely no reason for anyone to have to scramble to move their money out of Scottish banks ‘just in case’.
There is no process by which you take an existing bank account and just remove the £ sign and shove on S£ instead. Sterling is not ceasing to exist so this is a currency exchange in exactly the same way as when you go to the Post Office to get some US dollars. If you have notes and coins you can sell them via your bank to the SRB and get new S£ notes and coins in their place. If it is digital money the same process applies. Your bank gives you a new bank account with a new account number and new Scottish payments system sort code. You can then instruct your bank as to how much of your sterling in your old account should be sold to the SRB and thus how many new S£ should go into your new S£ account. That could be everything, a fixed amount, a percentage or nothing as you prefer.
If you lend to a Scottish bank it will not be ‘uncertain’ as to how you will be repaid. This would be quite clearly specified in the bond t & c’s. If issued under English law and via the London markets the default position would be it stays sterling until redemption. That could only be changed if the bond contains an explicit condition that it converts to S£ in the event that Scotland introduces its own currency. That could, in any event, only apply to bonds issued from now on. If issued under Scottish law the default position is that the bond would follow the Lex Monetae, so the conditions in that case could specify it stays sterling, though that would probably not be in the bank’s interest.
People’s money does not change currency automatically by decree. What does change under the Lex Monetae is legal contracts and the currency of the state (i.e. for tax). Any sterling stays as sterling unless you take explicit action to instruct your bank otherwise. Any hint of compulsion, confiscation, or whatever would be to shoot ourselves in the foot and crash the new currency. That is why we do not do it, so on Day 1 the only folk that have the S£ are those who have explicitly asked for it. There are thus no sellers on the FX market, so therefore no risk that the S£ falls. In fact it will tend to rise (potentially strongly) because there is still a lot of sterling in Scotland. Maybe £40 billion is exchanged (40%) but that leaves £60 billion not exchanged. All what I call ‘late exchangers’ will gradually find keeping their money in the currency of a foreign country becomes inconvenient and expensive. Sterling will not be accepted for the Council Tax, Income Tax, speeding tickets, etc. So that £60 billion will be gradually exchanged over the next 2-3 years. In order to prevent the S£ going through the roof (remember, only S£40 billion was issued at the outset) then ScotGov needs to run an unfunded overdraft at the Reserve Bank and the Reserve Bank may well have to gradually sell S£ into the FX market.
My prediction is that the S£ will gradually rise against sterling, but largely because a post brexit sterling is falling against everything. Also Scotland does not have a huge Balance of Payments deficit, and as I explained above the way the currency is introduced ensures a sustained future demand for it.
I am persuaded
Clive?
Sorry, Richard, I am not persuaded. The arrangements for optional cash conversion are fine that is not the issue I have been troubled by
It is the problem of Asset-Liability mismatch generated by redenomination of banks’ assets (eg a 10 year loan to a Scottish company) into S£ but not the corresponding liabilities (eg. a 10 year bond issued in GBP)…. and I need to understand why you DON’T think there is a problem.
Do you accept that banks will be forced to take on FX and Interest rate risk as a result of this process. Yes or No? If No then we need to talk!
If Yes, I presume you think the risks are not significant…. and I accept that I have little idea how things will pan out in terms of FX and interest rate levels in both currencies… but what I do know is that regulators will (rightly) require banks to put up substantially more capital against this business and that will be a problem for banks.
The hedge for the risk that is thrust upon them will be two interest rate swaps (to hedge the fact that S£ rates will not follow the same path as £ rates and (more crucially for the FX market) a sale of S£ versus £. This requirement to sell S£ as a hedge may be met by the desire from customers to convert cash balances into S£ but we don’t know.
Once again I must stress that I am not against Scottish Independence. Indeed, my Welsh heritage makes me sympathetic. Furthermore, as a proponent of MMT it follows automatically that a nation needs its own currency. All I am trying to do is get people to understand the risks; forewarned is forearmed.
So, suppose a Scottish bank offers to buy the mortgage book of an English bank at fair value durin g the pegging period (even if short)
It does so issuing s£ debt issued at par to the rUK£ during the pegging period
The payment is in rUK£
The Scottish bank then has a s£ liability and a s£ asset
Where is the issue?
Dr Rideout,
In the circumstances my comment here is an anachronistic curiosity, yet is perhaps germane. After 1707 Scotland continued to use £ Scots and £ Sterling within Scotland, together and in harmony for decades, and without any problems. Especially in the non-urban areas, which was most of the country; payments in kind still often prevailed and people were already used to working out comparative rates for an understood measure (for example a grain measure, the chalder). £ Scots just slowly disappeared, particularly I think through commercialisation, industrialisation and the growth of trade with the Empire.
I still do not see what the issue is. I have in front of me the annual accounts for Lloyds Bank and those show that the assets and liabilities are about £800 billion, though that includes Scottish Widows insurance business. The loan assets at £440 billion are only slightly greater than the customer deposits at £410 billion. For the Group overall they have wholesale funding of £120 billion out of that £800 billion balance sheet, though it looks like a lot of that is to do with the insurance and other ancillary companies given the bank would only need the £30 billion difference between the deposits and loans. You seem to be working on something like the loanable funds theory that the bank can only lend £100,000 for a mortgage if it has the money first, when in fact it just creates it. Certainly in the case of Lloyds the accounts do not suggest that there is a vast amount of Lloyds bonds or other wholesale funding that is covering the loan advances. Given the size the £100,000 advanced for the mortagage becomes a customer deposit (though maybe a different customer) so no funding is needed. They only need to worry about any net inflow / outflow in their reserve account in the BoE clearing system.
In the case of our new currency lets us say that 10% of the Lloyds bank (so 10% of the bank liabilities / assets of £440 billion) are the newly reconstituted Bank of Scotland. The bank converts the loans into S£, but the customers also convert the liabilities (deposits) into S£, so where is the mismatch? If, for example, most people choose to have the loans transferred (say 80%) but let us say only 40% of the deposits, then I agree it could be for a period that the S£ assets (the loan book) exceed the S£ liabilities (the deposits) while the sterling assets are less than the sterling liabilities. That will change relatively quickly (a year or two) as folk move more sterling into S£. It is also still a single bank so it only actually has one balance sheet and not two. Why is there an FX risk? The loans are now 80% in S£ and the repayments and interest are being paid in S£. To my mind the only risk would be that the sterling depositors suddenly withdraw their sterling deposits as sterling to another bank, in which case the bank would have to transfer some S£ back to sterling, or borrow sterling. These sterling depositors are, though, in Scotland and often the same people as have the loan liabilities. However if 40% of the deposits were withdrawn suddenly the bank would fail anyway without external support. Lloyds seems to have little in the way of wholesale funding, but to the extent there is a mismatch surely it is not beyond the capabilities to issue some S£ debt and use the proceeds to repay £ debt or vice versa as required? If that is done immediately (the first month or two) the rate is one to one, so no FX problem.
It would be a Scottish bank and the sole responsibility for regulating it would be the SRB. rUK regulators are of little relevance in the same way that Spanish regulators are not relevant to Santander UK Plc. If the bank had a sterling liquidity problem as described above (the loan book becoming largely S£ in advance of the deposits becoming S£ then the SRB can lend the bank the necessary sterling (given it will have enormous sterling reserves arising from the sale of the S£) with security provided by the S£ loan book. So any FX risk then falls on the SRB and then is a cheap, quick and easy way of covering your issue which does not require anything to do with market borrowings, etc and can be sorted out with only two parties – the bank and the central bank.
If the S£ increases against sterling there isn’t a problem anyway as the assets would go up in value relative to the liabilities. So what you are really predicating the issue on is that the S£ would fall against sterling. As I have also explained I really can’t see why it would do that. The FX market is a matter of supply and demand, there is a sustained demand for the S£ at least for the first few years, while the supply is going to be fully under the control of the SRB and ScotGov. People are not going to move their sterling into S£ only to immediately dump them and rush back to sterling. The potential sellers of S£ are: 1) Scottish importers, 2) Scots travelling abroad and the SRB / ScotGov. Unlike sterling at least at the outset there are no billions of S£ sloshing around the world or in hot money.
Mr Parry,
I think the framework here is important. The UK will say anything to stop Scottish independence – now; that, I think we can say is simply a fact. The UK wants simply to stop it happening. We are now supposing it has happened. Scotland has voted to go in a referendum. Then what?
I find it difficult to understand why “Unionists will scream that they will withhold co-operation” after the decision to leave is made. There is nothing left in it for them. Not only is that postion deliberately, a toxic act of self-harm to both rUK and Scotland (and for what benefit?), but rUK needs to maintain its position and prestige in the world. This is not the way to do it. Harming its oldest, closest ally for 300+ years (probably still under the same Crown) at the outset – and itself – is scarcely establishing the appropriate credentials of rUK (the continuator state, but in international optics not the same state) that the world will see. I have greater respect for rUK, than believe that it would fall so low. Why do you think this likely?
I agree with your logic John
This instability would heavily impact rUK banks, after all
When I rushed off this morning I wanted to add to the information. The precedents are complicated, because the conditions are often complicated when states break up. There is no standard code. The position is also complicated by successor and continuator states, and partial and universal succession. Illustrations are valuable. Rein Mullerson, ‘The Continuity and Succession of States, by Reference to the Former USSR and Yugoslavia’; in, ‘The International and Comparative Law Quarterly’; Vol. 42, No. 3 (Jul., 1993), pp. 473-493 is helpful, because it analyses the major USSR continuator/succession issues. The Baltic states had no part of the rights or obligations of the continuator state, Russia; they were (effectively) treated as the pre-1940 succeeding Baltic states (p.482). For the rest, “an understanding was reached between Russia and the other CIS member States, apart from Ukraine, that Russia would take over international liabilities as well as assets. Ukraine accepted 16.37 per cent of these, but at the beginning of January 1993 announced that it would not continue with a deal concluded with Russia in November on sharing debt repayments” (p.480). It appears Ukraine is still in court with Russia regarding some aspects of rights and obligations. The FRY and SFRY I shall not discuss because of the special problems associated with the end of Yugolslavia and the successor states.
I would wish to single out one problem that strikes me from perusing the law texts as a non-lawyer; the lack of sophistication of lawyers in understanding the power of monetary economics and its capacity to overwhelm the mere intentions of constitutional settlements.
I hope you are right – indeed, you may well be right…… but I fear that the current UK Government will prove to be small minded and vindictive.