Credit Default

February 9, 2014

3. On unicorns for tea...

 

Last night for my tea I had unicorn. Well, OK, I didn't. It was a burger. But in effect it was a unicorn. You know, four legs, mammal. Close enough. The international money markets will see it as a unicorn and that's what counts.

 

This is the out-the-box stance on Scotland's debt position post-independence as invented by various Better Together types. When they say it it sounds like this; Scotland is part of the UK. The UK has debt obligations to international money markets. If Scotland leaves the UK then it has some sort of ill-defined moral requirement to accept a part of that debt. No-one has come up with a successful legal reason why that should be the case, and that is because there is no legal reason why Scotland should have to inherit the debt (for an explanation of why read this). But the international money markets are known for their highly-attuned moral stance and so if Scotland ended up without any of the UK debt those money markets would be so morally offended that they would treat it as if it was a default.

 

No, hold on, that's not right. Money markets don't take a moral stance. Let's start again. Scotland has accrued debt on behalf of its citizens. In practice it is the citizens individually and collectively who hold and are responsible for that debt. Therefore if those citizens are in the UK the debt is with the UK and those that leave carry the debt with them so the collective totality of former-UK citizens who then form the nation of independent Scotland carry that debt with them. If Scotland doesn't meet the accrued debt of its citizens then it is in default.

 

No, hold on, that's not true. The debt is not only individually and collectively by citizens but by the UK government. Let's try again. While Scotland has no legal requirement to take any of the debt, that's not how international money markets work. They are interested only in how likely a nation is to repay its debts. So while Scotland doesn't really technically have any debt, a potential lender will look at the fact that Scotland didn't pay lots of money to Westminster and conclude that oil-rich, asset-rich, resource-rich, debt-free Scotland is a bad credit risk because it cleverly escaped the UK's debt obligation.

 

No, hold on, that doesn't sound right either. Because it's not. None of this is right. A debt obligation is a debt obligation. A default is a default. And a unicorn is a unicorn. The UK has taken on a debt obligation. Not only does everyone know that debt obligation is the UK's, just in case there is any doubt the UK just made the public statement that this is their debt obligation, theirs alone and that they alone will pay it off (though they expect a Scottish contribution). Scotland has no debt obligation. A default is when you fail to repay a debt obligation. Scotland has no debt obligation so it cannot be in default of that debt obligation. There is no 'in effect'. There is no 'sort of'. Imagine if there was. Imagine if I bought a TV on my credit card. Imagine you came round to my house every day and watched it just as much as me. Imagine I stopped paying my credit card bill. Would you be liable? Would your credit rating be hit because 'in effect' it was your TV too? There is no such thing as being 'in effect' legally bound by terms set when someone else borrowed money.

 

What the very serious-sounding Better Together economists are trying to suggest is that Scotland's credit rating would be hit because it would be seen as untrustworthy. These economists haven't presented any evidence that this would be true; they just keep offering the opinion dressed up as fact. They use the word 'default' at will because they're trying to scare you. Their use of the word is entirely unjustified. They use the word 'default' so that they can then use the term 'crippling borrowing costs'. Mainly so they can use the word 'cripple'.

 

Meanwhile back to recent history. The Icelandic government is generally taken to have 'defaulted' during the collapse of its banks. This too is wrong; Iceland (unlike Britain) allowed its banks to default by refusing to bail them out. But this is certainly much closer to a default than anything likely to happen in Scotland. So how hard did Iceland to find it to borrow money after it's 'default'? Not difficult at all. Iceland managed to have a bond issue oversubscribed – and at borrowing rates not much higher than previously. Why? Because Iceland didn't take on its banks' debts. That meant that the government itself was much less in debt than it otherwise would be. So people were happy to lend it money.

 

Once again, why would money markets hesitate to lend to a nation with enormous assets and wealth (not to mention the large oil reserves) which had zero debt obligations and had never once defaulted on any borrowing terms it had taken on? Are we meant to take seriously the idea that these money markets would simply feel so bad for the UK treasury which mishandled the whole affair and landed itself with an even bigger debt that it would punish Scotland as an act of solidarity? Or might those money markets be on the first plane to Edinburgh, greeting us with a 'slick move dumping the debt on those dumb UK treasury types, nice looking public finances, impressive assets – how much do you want?'

 

So let there be no more talk of default. Let there be no more talk of 'crippling rates of interest' which (a) recent precedent suggests is pure scaremongering not related to events and (b) refers to the crippling interest to be paid on debts we don't have. If the worst came to the worst and Scotland was left in a position where it had to play its most aggressive card, we would walk away with no debt, no default and no problem raising money. Professor 'I speak on behalf of the money markets and you better do as I say' is plainly at it. All assertion, no fact.

 

It is probably worth making clear at this stage that despite the fact that it wasn't us that created this debt catastrophe, I do think we have some moral responsibility for the debt the rest of the UK has. After all, most of the rest of the UK had no say in the building up of that debt either – it was Alistair Darling who was responsible and the first time voters had the chance to get rid of him as a result they did.

 

But in a few blogs' time I'm going to make clear that how Scotland responds to that moral responsibility would be our choice and not the UK's. If we collectively as a nation decided that we were going to be selfish and self-interested then we could decide to hell with morality, let's do it the British way and loot every penny we can from any other nation we can – in this case Britain. I hope we don't, but it's an option open to us.

 

What I shall accept no more of is academics presenting themselves as experts who are saying things which are simply and verifiably not true. Since we're not a debtor nation (Scotland has no borrowing powers) we cannot default. And money markets do not bring down perfectly viable nations on behalf of Blair McDougall. It's all bluff, distortion and grandstanding. If you ever hear the word 'default' mentioned in relation to Scottish independence, simply shout 'STOP!' and demand that the speaker indicate which debt obligation the Scottish Government has entered into which it is proposing to walk away from.

 

And if they say 'in effect...', just tell them you had a unicorn for your tea.

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