Refusing to accept a share of UK debt would be worth twice as much as North Sea oil to an independent Scotland, but risks triggering "punitive" borrowing rates, a leading think tank warns today.
Starting with no debt could substantially improve Scotland's otherwise "poor" economic outlook, Glasgow University's Centre for Public Policy for Regions (CPPR) says in a new report.
But it said that, unless achieved through agreement, it could spook the markets and force Scottish ministers to borrow at potentially sky-high rates.
First Minister Alex Salmond has threatened to walk away from all debts if the UK Government blocks a currency union between the UK and an independent Scotland. No 10 was yesterday forced to confirm that remained the position after Defence Secretary Philip Hammond said nothing would be ruled out in independence negotiations.
Steven Camley's cartoon
The Tory Defence Secretary is expected to warn that Britain would no longer be "great" if Scots plump for independence as he visits Glasgow today.
But a serious gulf developed between the pro-Union parties as Labour sources accused Mr Hammond of "unhelpful" negative attacks on the SNP.
The Nationalists say that all UK debt legally belongs to the Treasury.
Mr Salmond has said that an independent Scotland would want to take a "fair share" of that debt, but only if it was allowed to share what it describes as a joint "asset" - the pound.
The CPPR analysis shows that a zero share of UK debt would "substantially improve Scotland's fiscal balance".
It says that there are a range of ways that Scotland could assume a small or nonexistent share of UK debt. These include as part of a trade-off during independence talks, for example over nuclear weapons. But the "flawed" threat to refuse the debt risks denting Scotland's economic reputation.
The report warns: "The latter outcome may then trigger the application of a punitive rate of interest, which would have a detrimental impact on Scotland's businesses, local authorities and borrowers in general."
CPPR economist John McLaren said: "Scotland's share of current debt servicing costs is twice the size of projected future oil revenues. However, any benefit arising to an independent Scotland from starting with zero historic debt would be heavily influenced by whether this was achieved via amicable negotiations or through Scotland's refusal to accept what the remainder of the UK (rUK) consider to be an appropriate share."
According to the report: "The £5.5 billion improvement seen in Scotland's 2016-17 fiscal balance through not having to service existing debt is worth twice as much as the contribution from North Sea tax revenues in that year (£2.7bn, using a geographic share of the Office for Budget Responsibilty's latest forecast). However, this apparently very positive picture is clouded by a number of uncertainties."
Scottish Finance Secretary John Swinney said that the report showed "exactly how strong a hand Scotland will have in negotiations following a vote for independence".
It also showed why "it will be in the overwhelming economic interests of the rest of the UK to negotiate fairly and openly", he added.
"The UK Treasury has already made clear that, in the event of independence, it will remain legally liable for the entirety of UK national debt.
"However, the Scottish Government takes the fair, reasonable and responsible view that an independent Scotland should pay for a fair share of debt - but any agreement which includes liabilities must also include a fair share of the assets of the current UK and the pound."
Mr Hammond's admission to The Herald earlier this week that following any Yes vote "everything will be on the table" was seized on by Deputy First Minister Nicola Sturgeon who said he had "conceded that by definition there will be negotiations on currency, flatly contradicting the bluff and bluster from his Cabinet colleague George Osborne".
A Better Together spokesman said: "Only Alex Salmond is suggesting that Scotland would default on our share of the debt if we leave the UK."