Scottish ‘yes’ vote could improve UK credit

Britain could end up with a better credit rating if Scotland votes for independence, with a ‘yes’ providing the catalyst for an upgrade of the remaining UK’s debt, according to Moody’s.

The rating agency said Scottish independence was “unlikely” to have any impact on the country’s credit and that the elimination of the sizeable fiscal transfers between the rest of Britain and Scotland could actually be a “credit positive”.

In a series of reports on the impact of independence, Moody’s said it believed Scotland would likely hold an investment grade rating, but warned that the rest of the UK would only maintain its current credit if the Scottish accepted their share of Britain’s debt pile.

Moody’s added that a currency union with the rest of the UK would not be good for the Britain’s rating and that the adoption of its own currency would be the best outcome.

“A potential currency union with the remainder of the UK would be credit negative if it were to materialise. However, cross-party opposition to such an outcome makes this unlikely,” said Moody’s.

It added: “Scottish independence would eliminate the current fiscal transfers between Scotland and the remaining regions of the UK, marginally improving fiscal dynamics for the remainder of the UK given higher Scottish per capita public expenditures and Scotland’s older demographic profile.”

Moody’s said it expected it would award an independent Scotland an ‘A’ rating, but said that it could well end up with a worse credit. In particular, the ratings agency pointed to redenomination risks with savers’ deposits being converted from pounds into the country’s new currency, which it warned “might not possess the external purchasing power of sterling”.
Last week, Standard & Poor’s said it thought Scotland was risking creating an Icelandic-style banking crisis if it voted for independence, pointing the likely size of banking assets compared to the country’s post-independence economy.

Several major financial groups are registered or headquartered in Scotland, including Lloyds Banking Group and Royal Bank of Scotland, but S&P warned these organisations would face pressure to move operations south of the border.

“In our view, the willingness and ability of a future Scottish government to support its banking system is challenging at this point,” said S&P.

Lloyds and RBS have avoided giving their opinion on a ‘yes’ or ‘no’ vote, but have warned in their annual reports that independence presents a potentially significant risk for their businesses.

The British Bankers’ Association recently surveyed its members on the subject of independence, but found little appetite to actively campaign in favour of maintaining the Union, particularly after the CBI’s embarrassing U-turn on the issue.