Tuesday, 30 June 2020

A no deal Scexit

The UK’s national debt at present is approximately £2.4 Trillion. But there is a simple way that we could owe nobody anything. If Britain declared independence from itself then we would owe zero pounds. If seceding from oneself is illegitimate, Britain could secede from Cornwall and decide that Cornwall is the inheritor of all Britain’s debt. Cornish independence would mean that each citizen of Cornwall (Kernow) owed nearly 5 million pounds, but that would be their problem not ours. Alternatively, if we took pity on Cornwall, we could decide that it was in fact Scotland that deserved all Britain’s debt. After all the SNP keeps demanding independence. What if Britain seceded from Scotland?  Each Scot would then owe £500,000 pounds.

If it were legitimate for Scotland to secede from the UK and not owe any debt, it would equally be legitimate for everyone else to secede from Scotland and not owe any debt. What makes the shared British debt belong to people in Yorkshire, but not belong to people in Aberdeenshire? The debt after all was taken out jointly by the UK and was used for the benefit of all of us. So why should a big bit of Britain be left with all of it and a small bit of Britain be left with none rather than the other way round. Scottish independence could leave Scotland as the successor state to UK assets and debts. The rest of Britain could owe nothing.

 There is however a word for this. It is default.

Some Scottish nationalists apparently seriously suppose that after Scottish banks were bailed out in 2008 and after the Treasury has paid our wages and kept our firms from going bust during Covid, and after asking for the furlough scheme to be continued for as long as the Scottish economy needs it, that after all this we could declare independence and walk away owing zero pounds. But if this were legitimate why doesn’t everybody do it?

Crete could solve its unemployment problem by seceding from Greece. Sicily could become rich by seceding from Italy. The Confederacy could once more secede from the United States, but this time base its economy not on slavery but on being debt free.

But there is a very simple reason why this doesn’t happen everywhere. The markets would view such secession as a default. If Scotland were to refuse to pay its share of the Britain’s nation debt, markets would be very reluctant to lend to Scotland again unless it paid a very high interest rate. Scottish bonds would have a junk rating because of the risk. This would be not merely because Scotland as a newly independent country would have no track record of repaying debt, worse than that it would have a track record of refusing to pay back debt that had in part been issued for the benefit of Scotland.

This would perhaps be less problematic if Scotland were running a surplus when we became independent, but unless we discover some more secret oil fields, or better still secret gold mines, we would be running a 7% deficit. In order to fund this deficit, we would have to ask bond markets to buy Scottish bonds. But who would we be asking? We would be asking people in the City of London. But these would be the very people who we had just refused to pay back our debt to. So not only would Scottish bonds be junk we would expect the City to throw good money after bad.

If Scotland could emerge from Scottish independence with no debt, then so too could every other part of Europe that saw reneging on national debt as a way to solve its financial difficulties. Would this tend to encourage or discourage default? How much cooperation would Scotland receive from other European Union countries or indeed from the rest of Britain?

Would Scotland be welcomed with open arms into the European Union having set off a domino of default from Catalonia to Flanders? Would the Bank of England cooperate with Scotland? Would indeed consumers from other parts of Britain decide that they neither wished to trade with Scotland nor indeed allow their roads to send goods and services northwards. Would the British Army help if the Faeroes decided to invade Scotland?  

In order to become independent Scotland would require the cooperation not only of the rest of Britain but other countries around the world. Refusing to pay a proportional share of Britain’s national debt would be a no deal Scexit. Worse it would be a no deal while Scotland didn’t even have a central bank, a means of raising taxes and a way of paying benefits, nor indeed a currency. Scottish nationalists who propose this sort of unilateral independence would turn Scotland into a pariah with no friends and no money.