The UK Government is claiming that independence would not affect the legal personality of the UK.
If the UK continues to exist as a legal entity, logically it would keep non-territorial assets, as well as all contractual liabilities, as Russia did on dissolution of the USSR.
Furthermore, the Treasury has stated that "the continuing UK Government would in all circumstances honour the contractual terms of the debt issued by the UK Government".
Despite this, representatives of the No campaign have argued that Scotland not taking on any debt would constitute a "default". What constitutes a default?
The majority of UK gilts are fixed- interest, fixed-term bullet bonds and there is generally no right to prepay. Debt service must be paid in full, at the scheduled times and by the contracting party. In relation to the final point, if halfway through the life of a bond, the UK transferred its obligations to another country, the UK would not have performed its contractual obligation to make all scheduled payments.
Even if bondholders agreed to the change, technically, the UK would have defaulted. The UK appears to have been slow to recognise this.
According to John McFall, the former Labour MP who was also chairman of the Commons Treasury Select Committee, "the Treasury and the Debt Management Office have been approached by investors, asking about the situation. Will, for example, the Treasury split the gilts into Scottish Government gilts and UK gilts, if that's the case, that would create real uncertainty and it risks Scotland being an international pariah".
This indicates that the UK had somehow managed to give investors the impression that it was contemplating an exchange into Scottish bonds. Lord McFall's suggestion that Scotland accepting the UK's demands to take on a share of debt would result in it becoming a pariah is illogical.
However, it is likely that the UK forcing an exchange on investors would have constituted a default by the UK. While the UK has been forced into the unusual position of publicly reassuring its investor base that it's not planning to default, it is not possible for Scotland to default on the UK's debt.
Rating agency definitions relate only to contractual obligations, for good reasons. If Scotland takes on £1 of debt, how do you establish that this is not the correct amount, given that there is no contractual amount? How do you determine whether Scotland is paying on a timely basis, given that there is no debt schedule? Whom do the agencies believe if Scotland says a fair share of the UK's debt is £10 billion and the UK says it is £100bn?
The argument appears to be that rating agencies and investors will see Scotland as having defaulted "morally" and this might damage its ability to raise finance.
This ignores the rating agencies' published criteria on how they look at situations where there has genuinely been a default.
"Standard & Poor's takes no position on the propriety of government debt defaults, repudiations, and the like." Instead, it says, "Standard & Poor's ratings are an opinion of the probability of default on a forward-looking basis. We analyse historical defaults to form our own view as to the extent that they could affect the likelihood of the sovereign defaulting in the future. In general, Standard & Poor's sovereign ratings apply only to debt that the present government acknowledges as its own".
Investors and rating agencies will assess the future probability of default on debt that Scotland has contractually bound itself to pay. The share of assets and liabilities that Scotland takes on as part of its exit from the UK is purely a commercial matter, which the UK is publicly pre-negotiating.
To minimise its future cost of debt, Scotland should demonstrate commercial competence, negotiate the best possible share of assets and liabilities and make full and timely payment on any contractual debt obligations that it takes on in the future.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article