Scotland, independence, the pound, and the debt

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jdaw1
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Scotland, independence, the pound, and the debt

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flash_uk
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Re: Scotland, independence, the pound, and the debt

Post by flash_uk »

It's a bit harsh to classify this as meaningless drivel... :lol:

I confess I lost the logic trail at some point. I think it was here:
As the crisis develops, the larger country will realise that ‟If we don’t help, they destroy our banking system"

Why is it that the "insolvent" Scotland using the GBP destroy the UK banking system? Hasn't the trust/value been lost in the debtor (Scottish State) rather than the currency (GBP)? So if a spend-happy Scottish government managed to fool people into lending GBP to Scotland, and then defaulted on repayment, the value of lending contracts to the Scottish State would plummet. I suppose if much of that "lending GBP to Scotland" had been done by UK financial institutions then I can see how the UK banking system might be in trouble....hence your solution:
"The solution is to require banks to hold extra capital against Scottish risks."

F

Edit: meant to say debtor not creditor above. Fixed.
Last edited by flash_uk on 16:56 Mon 24 Feb 2014, edited 2 times in total.
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jdaw1
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Re: Scotland, independence, the pound, and the debt

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UK (ex-Scotland) banks have lent the money. UK (ex-Scotland) pensioners and insurance companies have lent the money. If debtor refuses to pay, that’s a few-hundred-billion sized hole that needs filling. Out of UK (ex-Scotland) taxes.
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flash_uk
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Re: Scotland, independence, the pound, and the debt

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OK, so is that concentration risk? Almost ALL of the future Scottish State debts would have been lent by almost ONLY UK financial institutions?

On the sharing old UK debt thing, is there a theoretical solution whereby new Scotland issues a set of debt instruments in its name, equal to the value of their "fair" share of old UK debt, then uses the proceeds to pay back new UK. But presumably the price of this borrowing will be higher to reflect the lower creditworthiness of new Scotland. (This may be what you said somewhere in your debt paragraph, but I couldn't be sure!)
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jdaw1
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Re: Scotland, independence, the pound, and the debt

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flash_uk wrote:OK, so is that concentration risk? Almost ALL of the future Scottish State debts would have been lent by almost ONLY UK financial institutions?
If £, yes. If not, no.
flash_uk wrote:On the sharing old UK debt thing, is there a theoretical solution whereby new Scotland issues a set of debt instruments in its name, equal to the value of their "fair" share of old UK debt, then uses the proceeds to pay back new UK.
When money is discussed, friendship will evaporate.
flash_uk wrote:But presumably the price of this borrowing will be higher to reflect the lower creditworthiness of new Scotland.
Yes.
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Re: Scotland, independence, the pound, and the debt

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Fascinating, thank you Julian. Have been having some extremely interesting discussions vis-à-vis iScotland lately. This will be excellent grist.

Those who predicted that the Northern Irish parties would, wisely, keep out of this matter were wrong; too much to lose for all them by doing so.
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Re: Scotland, independence, the pound, and the debt

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jdaw1 wrote:
flash_uk wrote:On the sharing old UK debt thing, is there a theoretical solution whereby new Scotland issues a set of debt instruments in its name, equal to the value of their "fair" share of old UK debt, then uses the proceeds to pay back new UK.
When money is discussed, friendship will evaporate.
I confirm from experience that this is a certain outcome of a divorce.
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flash_uk
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Re: Scotland, independence, the pound, and the debt

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OK final question from me :)

If new Scotland were hypothetically to go down the route of using GBP as currency (or equivalent pegged to GDP), issued new Scotland debt instruments, which were (somehow miraculously) not taken up by new UK financial institutions, and paid down the new Scotland share of old UK debt...would there then be less concern about risk to new UK banking system. It seems like in this situation, to a UK bank, new Scotland would look no different to X (pick any smallish country with its own currency...Denmark?)
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Re: Scotland, independence, the pound, and the debt

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flash_uk wrote:If new Scotland were hypothetically to go down the route of using GBP as currency (or equivalent pegged to GDP), issued new Scotland debt instruments, which were (somehow miraculously) not taken up by new UK financial institutions, and paid down the new Scotland share of old UK debt...would there then be less concern about risk to new UK banking system. It seems like in this situation, to a UK bank, new Scotland would look no different to X (pick any smallish country with its own currency...Denmark?)
Most Danish Krone risk is held by Danish financial institutions. Sure, there is a bit elsewhere, but a mere bagatelle compared to the Greek/Spanish/Irish/Italian risk in the German banking system.

How did all that risk get in the German banking system. It has to. It can’t help it? Spanish importer buys stuff. Germany exports stuff. Money flows from Spaniard’s account in a Spanish bank to German’s account in a German bank. Where does Spanish bank get that money to make the payments? It borrows it back. Some might be borrowed directly from a German bank, and some might come in a chain: A lends to B who lends to C who ! lends to Z. But Germany is running a huge surplus within the Eurozone, so unless the German banks withdraw it in 0% cash, it flows to the borrowers. Oh dear.
flash_uk wrote:OK final question from me :)
Doesn’t have to be.
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flash_uk
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Re: Scotland, independence, the pound, and the debt

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jdaw1 wrote:
flash_uk wrote:OK final question from me :)
Doesn’t have to be.
Except that every answer opens up myriad new questions in my head! You can educate me more over a bottle of port some time :D
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Re: Scotland, independence, the pound, and the debt

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Standard Life have made their first public statement on independence (and are unlikely to be the only large Scotland-based financial services firm to be drawing up contingency plans....).

Interestingly, and in stark contrast to the various mechanisms available for corporate migration between EU members, moving companies within a group structure from Scotland to England or vice versa is not the easiest thing to do under companies law as it currently applies in the UK (though in the event of a "Yes" vote, one might expect that transitional provisions will be introduced to allow that to happen more easily)
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Re: Scotland, independence, the pound, and the debt

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Before the technical problem necessitating a restore of :tpf: from a recent backup…
DRT wrote:You have to admire the optimism of the SNP with their reaction to Standard Life's statement saying that it proves the need for currency union. Was it only me who thought it proves the need for a continuation of another type of union? :roll:
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Scotland, independence, the pound, and the debt

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The BBC, [url=http://www.bbc.co.uk/news/uk-scotland-scotland-politics-26489307]here[/url], wrote:Citi analysts estimated the borrowing rate for an independent Scottish government would be around one-and-a-quarter percentage points higher than the UK level, although it could be more initially.

The researchers also said they did not regard the Scottish government's "threat" to walk away from Scotland's share of the UK national debt as being "wholly a bluff".

They said that while such a move "would probably cause a new Scottish government to acquire a default premium on future borrowing" it would also "cut Scotland's fiscal deficit by about 3% of GDP", bringing the deficit "below the UK level and give Scotland a low or zero initial debt ratio".

Responding to the bank's report, the Scottish government said a currency union was in the "overwhelming economic interest" of the UK.
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Re: Scotland, independence, the pound, and the debt

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If Scotland votes yes and manages to persuade the UK government to consider a formal currency union, would there need to be a referendum in what remains of the UK before that currency union could be entered into?
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Re: Scotland, independence, the pound, and the debt

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DRT wrote:If Scotland votes yes and manages to persuade the UK government to consider a formal currency union, would there need to be a referendum in what remains of the UK before that currency union could be entered into?
That is an academic question. Danny Alexander says that the UK government's decision on this is now 'final'. No negotiations could be entered into by the UK govt post-September since there will be a new UK govt after May next year, who could hardly be bound by agreements made prior to then. Will any party put currency union in its May 2015 manifesto? I rather doubt that any party wanting to be elected would do so.
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Re: Scotland, independence, the pound, and the debt

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Rightly or wrongly, that decision has been taken. No multi-state currency union: not €, nor any other.

Separately, I think quite right.
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Re: Scotland, independence, the pound, and the debt

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jdaw1 wrote:Rightly or wrongly, that decision has been taken. No multi-state currency union: not €, nor any other.
Is that decision enshrined in law or is it something that could be unilaterally reversed by a majority government even if they did not declare it in their manifesto?
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Re: Scotland, independence, the pound, and the debt

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DRT wrote:Is that decision enshrined in law or is it something that could be unilaterally reversed by a majority government even if they did not declare it in their manifesto?
Lab-Lib-Con have all spoken. Politically, practically, that would be effectively impossible to change.

Legally, Parliament is sovereign and can do whatever it pleases.

Practically, just no. It is true that residual UK does do a lot of trade with Scotland. But only half as much as it does with the $ block. Which is, in turn, about half as much as it does with the € area. And we just ain’t joining any of them.
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Re: Scotland, independence, the pound, and the debt

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jdaw1 wrote:we just ain’t joining any of them.
Good.
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