Listen to this article
Scotland would need to build up tens of billions of pounds in currency stockpiles to successfully use the pound without a formal currency agreement with the rest of the UK, to judge by comparisons with countries such as Denmark and Hong Kong.
The Bank of England governor Mark Carney wrote on Thursday to the Treasury select committee with an analysis of the reserves held by various countries that use another nation’s currency or adopt a peg.
Andrew Tyrie, chair of the committee, said the BoE figures suggested Scotland would need to amass “huge” reserves that could only be delivered through years of austerity.
For example, the BoE numbers indicate that Scotland would have to hold £34bn of reserves to match Denmark’s ratio of reserves to GDP, or £155bn of reserves to match Hong Kong’s ratio. If Scotland were to match those countries’ ratios of reserves to bank deposits or broad money supply, the figures would have to be much higher.
The letter from Mr Carney to Mr Tyrie sets out the reserves of a range of countries including Hong Kong, Denmark, Bulgaria and Estonia, while not drawing any explicit conclusions from the figures.
However, in a hearing on Wednesday Mr Carney said that £15bn would be at the “upper end of the range” Scotland might reasonably inherit as reserves if it became an independent country. Building them up further would entail “real fiscal costs”, he argued.
“The Governor’s letter demonstrates that, whatever currency arrangement is chosen, a separate Scotland would require huge reserves,” said Mr Tyrie on Thursday. “Scotland would need a multiple of that. The comparisons with Denmark and Hong Kong in the governor’s note say it all.”
Mr Tyrie added: “Scotland’s ability to borrow would be heavily restricted. Obtaining the reserves would mean much higher taxes or lower spending, or both, for years to come.”
Economists at UBS said in a note on Thursday that an independent Scotland would have to issue large amounts of debt almost immediately if it were to adopt a currency peg or opt for “sterlingisation” – where it uses the pound without a formal currency union with the rest of the UK.
This is because it would have to hold enough sterling reserves to convince markets it had a stable financial system and currency, the bank said.
“The need to acquire sterling reserves would be urgent, perhaps the highest priority of a newly independent Scottish administration,” it said. UBS estimated the minimum debt burden associated with sterlingisation would be 41 per cent of Scottish GDP, while the burden under a currency peg would be at least 58 per cent of GDP.
The Scottish government declined to comment. The Yes campaign did not immediately reply to a request for comment.
This article has been amended since original publication