Yes Vote Austerity Warning

An independent Scotland would face “unprecedented austerity” and be forced to introduce its own currency within one year if it reneges on its share of UK debts, according to a report.

Any attempt to effectively default would be viewed as “opportunistic” by international investors, who would then push up borrowing premiums or bar Scotland from capital markets, the National Institute for Economic and Social Research (NIESR) warned.

Such a move is also likely to see Germany block any Scottish bid for EU membership because it would set a “dangerous precedent” and leave the economic powerhouse exposed to insolvencies, the report suggests.

The Scottish Government has warned that, in the event of independence, it will withhold Scotland's share of the UK national debt if Westminster refuses to share the assets of the Bank of England.

First Minister Alex Salmond has also insisted Scotland cannot default on a debt it is not legally liable for and would have no moral obligation to pay without a share of Bank of England assets.

The NIESR report suggests that such a move is now the Yes campaign's “plan B”.

“The First Minister has threatened to walk away from Scotland's share of the UK public debt if his bid for a formal monetary union is not successful,” the report states.

“He has also insisted that Scotland would be able to continue using the pound informally in any event.

“This leads us to believe that adopting sterling informally while reneging on the debt might, in fact, be the Scottish Government's plan B.

“To be clear, we do not know for sure that this is plan B. But given Mr Salmond's statements and the total silence on any other option, we suspect that this is at least being seriously considered.”

If an independent Scotland continued to use the pound without the backing of a formal currency union, a process known as sterlingisation, the speculation surrounding the arrangement would lead to its rapid collapse, NIESR warned.

It added: “If the Scottish Government chose to combine sterlingisation with reneging on a fair share of existing UK debt, this would increase rather than reduce the fragility of the exchange rate arrangement.

“Entry into the EU would be out of the UK's hands. International investors are likely to see walking away from debt as opportunistic and charge very high borrowing premiums or exclude Scotland from international capital markets.

“This would imply an immediate return to a fiscal surplus and unprecedented austerity.

“Whether citizens of Scotland would accept this policy simply to hold onto sterling would become a source of speculation.

“We would expect the currency arrangement to fail and Scotland would be forced to introduce its own new currency within one year.”

Finance Secretary John Swinney said: “There will be a formal currency union, as a UK Government minister admitted, because it's in the overwhelming financial interest of the rest of the UK as well as an independent Scotland.

“If there was no currency union, Scotland would be debt-free and the rest of the UK would have to shoulder £120 billion extra debt that would be lifted from Scotland.”

Chief Secretary to the Treasury Danny Alexander said the warnings about an independent Scotland's potential “junk” status underlined the risk of a Yes vote.

He said: “This report is a stark warning from a highly respected economic institution of the scale of the risks a 'Yes' vote would mean.

“Junk status for Scottish bonds would condemn us all to higher interest rates and higher taxes to pay the inflated interest payments. That would consume vast amounts of money that could be spent on the NHS.

“The truth is that the entire economic case for separation is junk. Businesses, think tanks, and international organisations all confirm the same thing - separation is risky, costly and bad for Scotland.

“People may want to vote Yes for other reasons, but for anyone who is making up their minds based on jobs, prosperity and the economy there is only one conclusion: vote No.”

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