Scotland: thistle be tricky

We’ll burn those bridges when we get to them. That is one metaphor (appropriately confused) for how Britain has failed to plan for the financial break-up which would follow Scotland voting Yes to independence. Even if No wins on September 18, the margin may be tight enough to keep that failure on everyone’s minds.

Still, cheer up, giltholders. You benefit from the little preparation made so far. Months ago, the UK’s Treasury confirmed that it would honour all UK sovereign bonds in issue come what may. That reflects the legal reality anyway.

The UK ex-Scotland would owe the debt as the union’s successor state. It also avoids the complication of Scotland becoming counterparty on some share of gilts yet to be defined. Scotland would owe its share of the debt to the UK, instead.

This is the point of owning safe assets. They do not require much hard thinking. Scotland is under a 10th of the UK’s GDP. Remove it, and the credit of the continuing UK does not fall off its axis.

As a share of GDP, gross government debt would rise to nearly 100 per cent, compared with 89 per cent presently. A world that lends to Italy (whose debts exceed 130 per cent) at 2.2 per cent will hardly blink at this ratio.

Get to the assets and liabilities which the UK and Scotland would have to divvy up, and the thinking gets harder. Scotland’s share of the debt would be an asset for the UK. Why not repackage the claim, and sell the risk back to the market? This sounds outlandish but isn’t. Germany securitised Paris Club debts Russia owed it last decade. Investors may snap up a Scottish credit exposure if the new sovereign has little other debt to sell during its first few years.

The politically thorniest issue will be the fate of cross-border banking. To start with, shares in RBS are an asset of the UK. And every insured deposit in Scotland has the backing of the UK central bank. Who backs them after a Yes vote? Something for MPs in Westminster to debate. The 59 of them who are Scottish may have to sit that one out.

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