Scottish Liberal Democrat leader Willie Rennie has been taking a bit of a pasting on social media from nationalists who don’t like what he said in a tv interview yesterday. He argued what I thought was a pretty obvious point that in a Scotland where we were using the pound without the protection of a lender of last resort and where Alex Salmond had led us to inglorious default on our share of the UK debt, our mortgages, car loans and credit cards would be more expensive than they are now.
There are several reasons for this. First of all, if we have no lender of last resort, the banks have to keep more money in their reserves which mens they have less to lend out. That will push up their interest rates to start with. We would all end up paying more. Think about the effects that would have on already stressed household budgets. We’ve so far avoided the huge spike in repossessions that we saw in the 1990s recession. That could change rapidly.
Remember when Vince Cable was complaining that viable businesses were really struggling because banks wouldn’t lend to them in the wake of the last recession? We’d have that to deal with as well.
Yes campaigners would have us believe that Government borrowing rates and consumer borrowing rates were completely unrelated, yet there is evidence that there is a correlation between the two. I might find an economic system in which the interest I pay is based on whether some rich blokes (and they usually are blokes) are feeling confident or not bizarre, but that’s the way it is and the global economic system is hardly likely to change just because Scotland gets its independence. The Scotland’s Office Scotland Analysis paper on the Financial Services Industry shows that if the money markets don’t have confidence in a government, they won’t have confidence in the banks in that country either. Both Government and banks therefore end up paying higher interest rates. The paper says:
As a number of independent commentators have argued, if Scotland became independent it would not have the UK’s track record with the international financial markets, and could therefore be perceived by financial markets as less credible. When markets perceive weaknesses in the credibility of the sovereign, this negatively impacts the credibility of domestic banks, with a consequent increase in the cost of funding. Market perceptions of banks’ solvency are more closely linked to perceptions of the sovereign during periods of stress, particularly for those countries that experience a significant deterioration in their sovereign credit risk.
They have a model which shows the correlation:
So if the money markets take a dim view of Scotland because of the make-up of our economy or because we’ve defaulted on our debts, we will suffer twice. First of all, the higher cost of borrowing will mean that the government can fund fewer public services. Secondly, we’ll all be paying more than we are now for our personal credit in whichever form it comes. It’s not pretty.
Of course, the Yes campaign, and Alex Salmond himself, will argue that it’s the UK’s debt, not Scotland’s, legally, because the UK has guaranteed it. Why is that the case? Because it had to when the markets got spooked earlier this year. They were worried about lending to the UK and then facing the prospect of having to chase Alex Salmond for 10% of it after he originally threatened that he wouldn’t take a share of the debt. So the legal guarantee he is going on about is only there because of his irresponsibility. As his own trusted adviser Crawford Beveridge said last week, even if it technically isn’t a default, if it looks like Scotland isn’t taking on its debts, then the markets will react accordingly.
In addition to all of that, research by Costas Milas from Liverpool University and Tim Worrall of Eidnburgh University showed that even the Yes campaign rising in the opinion polls before a vote was cast made the markets more hesitant and unwilling to borrow over the longer term:
Our results suggest that a 12 percentage point increase in the Yes rating relative to the No rating lifts the 10-year borrowing costs relative to the 5- year borrowing costs by up to 24 basis points; it also rises with the size of the Yes_lead poll result.
Earlier this year the Money Marketing website looked at how mortgage lenders would review their lending in the event of a No vote.
Precise managing director Alan Cleary says there is uncertainty over currency, house prices and mortgage availability and lenders would be “nuts” not to launch a review following any yes vote.
He says: “There is a whole bunch of stuff we would have to review to make ourselves comfortable we could still confidently lend in Scotland. It will be the case for everyone and lenders would be nuts not to do it.”
Of course on top of all of this added cost of borrowing, Scots would face the loss of a significant guarantee in the event of a banking crisis. Our savings are protected by the UK up to £85,000 which is more than enough for most uf us. If our banks went under, we’d get that money back. That would not be the case in an independent Scotland using sterling outside a currency union.
Willie Rennie had this to say on the uncertainties of the currency plans:
The Yes campaign is involved in a conspiracy of silence to hide the real impact of their independence plans on Scottish households. With billions of pounds of consumer debt in Scotland any increase in interest rates would hit households hard in their pockets. But that’s exactly what will happen if Alex Salmond refuses to pay Scotland’s fair share of national debt.
A default of government debts on the first day of independence will put borrowing costs for the Scottish Government up. The international markets will charge them premium rates as the risks will be judged higher.
The contamination caused by a Scottish default would directly infect consumers in Scotland.
Figures from the Council of Mortgage Lenders suggest that households in Scotland owe £100 billion on their mortgages. With billions more tied up in other consumer loans any increase in interest rates would hit consumers hard in their pockets.
That’s the consequence of Alex Salmond’s plans. As part of the UK Scotland has a solid reputation for sound money across the globe. Refusing to pay our share of public debt will trash that reputation in just one day.
Alex Salmond’s refusal to deny that consumer debt costs would rise if he turned his back on Scotland’s fair share of public debt is revealing in itself. There is a conspiracy of silence at the heart of the Yes campaign. They know that their reckless threat to effectively default would cost consumers millions of pounds. Alex Salmond should speak out on this matter. He must not be allowed to let this be another unanswered question on the cost of independence.
His Fiscal Commission chairman Crawford Beveridge confirmed that walking away from Scotland’s fair share of debt would be the equivalent of a default. And a default sends warning signals to investors who subsequently want a higher price for investing in those bonds as a result of the higher risk.
The National Institute of Economic and Social Research have predicted that borrowing costs in an independent Scotland could go up by 1-2%. Translated into mortgage repayments, it could mean a rise of £1,300 per year for a 75% mortgage. And credit cards could go up by £120. Alex Salmond’s reckless default threat will hit us hard in our pockets.
Alex Salmond’s default threats make life in post independence Scotland a whole lot riskier.