September 16, 2014 / 11:48 AM / 5 years ago

Independent Scotland would struggle to keep pound informally - NIESR

LONDON (Reuters) - An independent Scotland would struggle to maintain an informal currency union with the rest of the United Kingdom for more than a year if it walked away from its share of the UK’s national debt, a think tank said on Tuesday.

"Yes" voter Jack Cunningham, 19, poses for a photograph while holding a Saltire flag in Edinburgh, Scotland September 12, 2014. REUTERS/Paul Hackett

Scottish nationalist leader Alex Salmond has said an independent Scotland might refuse to take on its share of the debt if it was not allowed to share the pound in a formal currency union.

In such a case, Scotland would be better off adopting a new currency rather than continue using the pound informally, the National Institute of Social and Economic Research said.

If it defaulted, Scotland would face punitive borrowing costs from international financial markets.

“This would imply an immediate return to a fiscal surplus and unprecedented austerity,” NIESR said in a report, questioning whether Scots would accept this for the sake of keeping the pound.

“We would expect the currency arrangement to fail and Scotland would be forced to introduce its own new currency within one year.”

Scotland’s future currency is one of several disputed issues in the run-up to Thursday’s referendum over whether to dissolve the 307-year-old union, the outcome of which opinion polls now suggest is too close to call.

All three main Westminster political parties are opposed to a formal currency union with an independent Scotland.

Even if Scotland takes on its share of British government debt, an informal union would be shaky given the twin fiscal and external deficits an independent Scotland would likely inherit, said NIESR.

It said Scotland would probably have around 7 billion pounds of foreign exchange reserves to defend its currency arrangement.

“Introducing a new Scottish currency has always been the most sensible option. We would recommend this is carried out before losing 7 billion pounds of foreign exchange reserves rather than after,” the report said.

Bank of England Governor Mark Carney last week said an independent Scotland would need big stockpiles of sterling if it adopted the pound without an agreement with the rest of the United Kingdom, since the BoE would no longer be last lender of resort for Scotland’s vast banking industry.

Scottish nationalist leader Salmond says Westminster’s opposition to a formal currency union is part of a campaign of fear that would provoke a backlash from Scots on polling day.

American Nobel Prize-winning economist Joseph Stiglitz, an economic adviser to the Scottish government, has said arguments about the currency were “a lot to do about nothing”, since there were many arrangements that could be successful.

Reporting by Andy Bruce, editing by John Stonestreet

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