An independent Scotland would be more likely to sell shorter-term bonds — at least initially — due to its lack of track record in the sovereign debt markets, according to a new report called “How would an independent Scotland borrow?” from the independent London think tank the Institute for Government.
“Demand for long-term Scottish debt is likely to be low initially due to Scotland’s lack of a track record and uncertainty over long-term economic prospects,” claimed the report.
“As a result, Scotland would be likely to get a better price on shorter-term debt.
“Such debt is likely to be less risky to (domestic and international) investors, and therefore to attract a smaller premium.
“Over time, Scotland’s capacity to issue longer-term debt would depend on which institutions demand that debt.
“If financial regulation remains similar, demand for long-term debt in Scotland could mirror that in the UK.
“However, if there is less domestic demand for Scottish debt (for example, if UK debt is viewed as a good – safer – substitute), a reliance on international creditors would likely mean that a shorter average maturity would be the most cost-effective approach.
“A shorter average maturity is not necessarily a disadvantage.
“As interest rates have consistently undershot predictions since 2010, any country that has operated with shorter maturity debt, and therefore refinanced more often at lower rates, will have reduced debt interest costs.
“But it would mean that Scotland’s fiscal position was more exposed to changes in international interest rates.
“The optimal strategy for issuing debt for Scotland would evolve over time, and would become clear only if Scotland became independent.
“However, it is likely to differ from the UK approach and making good decisions over the composition of debt in terms of currency and maturity would be important.
“A well-staffed debt management office based on the UK model is therefore the best way to ensure that Scotland manages its early issuances well and gets best value for money by issuing debt that matches demand.”
The report also said that as a new borrower, Scotland would pay a slighlty higher rate of interest on its bonds until it had established its credibility in international debt markets.
“… Scotland has no record of debt repayments,” said the report.
“A new country – with a new set of untested institutions – would not be as attractive to investors as otherwise similar countries.
“As a result, some premium would be necessary to incentivise them to hold Scottish debt over other assets …
“If Scotland can show that its institutions are robust, that its economy has good growth potential and that its politicians are able to make difficult decisions – where necessary – to ensure investors are paid, the premium should fall over time …”