Long but detailed, feel free to message me with questions The UK issues debt by issuing bonds, they are a contract to pay the investor a set amount (the principle) at a set date (usually 15 years hence) and also make interest payments (usually every 6 months) between now and then. This contract is between the UK treasury and the investor, the investor may transfer their end by selling the bond but the treasury cant transfer their part of the deal without the investor approving. These are backed by UK treasury and Bank of England, at the 15 year date if the government is in surplus they pay off some bonds, if in deficit they issue a new bond to pay off the old one, kind of like using a loan to pay off your credit card. UK has not been in surplus since the early days of the Gordon/Tony government. If Scotland took on some UK debt (as a fee for being in a currency union or in exchange for a share of assets such as gold reserves) this would happen as follows. 1. UK bond comes due for repayment (in UK pounds) 2. Scotland issues a new bond (in UK pounds) 3. Scotland gives the UK treasury the money to pay off their bond holder 4. Scotland now has the liability for payment 15 years out and interest between now and then The word default has a VERY strict meaning in finance, it means that an interest or capital payment has been missed. Scotland has no bonds it owes interest or capital on right now so they have nothing they can default on. If Scotland refuses to take on some UK debt then the UK treasury is liable for the payments and have already told the city markets multiple times that they will be paid. Scotland refusing to take on debt can be called immoral or unfair but it can’t be called a default. A country’s credit rating is based on the same things as a persons credit rating 1. Their ability to pay (debt to income) 2. Their payment or default history Finance is emotionless, so “unfair” or “Immoral” will have no effect on what interest Scotland has to pay for new bonds. I think it would be less moral for Scotland to take on debt with nothing to show for it and that is likely to be seen as a dangerous lack of judgment by the finance markets.
Posted on: Tue, 02 Sep 2014 19:05:47 +0000
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