It is hard to see investors queuing up to buy Scottish bonds, the subject of a consultation launched by the UK Treasury.
The major barrier is Scotland’s future place in the UK. Even if the referendum returns a "no" vote on independence in 2014, there is still much debate about providing Scotland with further devolutionary powers. Questions will remain as to how much power should be ceded by Westminster to Holyrood. Investors would not welcome such an uncertain climate.
Other countries with regional debt issuance, such as the US, do not have quite this problem. The US constitution clearly lays out the fiscal powers for the federal government on one hand and the individual states on the other.
There are other arguments against a Scottish bond. Without a guarantee from the UK government, Scotland would have to pay up for its borrowing. Additionally, the amount of borrowing being talked about is miniscule in international terms. Scottish ministers will have the power to raise the debt limit above its initial value of £2.2bn, but the annual limit will remain fixed at 10% of the Scottish capital budget — around £230m in 2014-15.
At such small levels, is it really going to “increase the transparency of [the Scottish government’s] finances in such a way that would allow for greater scrutiny from both market participants and the wider public”, the main benefit that the Treasury consultation document ascribes to Scottish bond issuance?
The figures also bring economies of scale into question. There will be significant costs for setting up a Scottish debt management office that could add additional costs to debt issuance.
Scotland can borrow from the UK government’s National Loan Fund at a spread of roughly 20bp above the equivalent Gilt rate. With the UK securing market access at historically low levels, it would be madness to not take advantage of this cheap cash.
Scottish bonds would be nothing more than a symbolic move that would come at a cost the country can hardly afford. Political stability and certainty should come first — the details of capital market access can come later.