On the Problem with Scotland’s Future Bond Plans

The Scottish Government’s decision to issue a wholesale bond is guaranteed to create all the wrong headlines at exactly the wrong time. 

Last week, I issued a report with Jim Osborne of the Scottish Currency Group criticising the Scottish Government’s decision to issue a wholesale bond, which you can find here. I think we did a good job making sure no one dozed off reading it. Surely the amusing name of “kilts” (instead of Gilts) must get you excited! 

In summary, we agreed that it is prudent to broaden funding sources by reducing borrowing from the UK’s National Loans Fund (NLF). That’s pretty much where our agreement ended. 

The interest rate paid on a wholesale bond (offered exclusively to investors in international financial markets) will be more expensive than a retail bond or one offered to Scotland’s Local Authority Pension Funds. It will also see up to £165 million in interest payments leak out of the Scottish economy over the bonds’ 10-year term.  If you are looking to ‘do your bit’, to support Scottish businesses and households, as the Scottish Government surely is, keeping this large chunk of money within the Scottish economy is a no-brainer.

Despite some answers to our two Freedom of Information requests, we were unable to find out why the idea of a retail bond – offered to Scottish businesses and households at, for example, £100 chunks – was dropped. A retail bond would not only be cheaper but also ensure that all of the interest payments remain in the Scottish Economy. So it looked to us that the wrong economic objectives had been selected. 

According to the Scottish Government, the bond is being issued to ‘crowd in’ international finance to Scotland, although the reports accompanying the bond – released via FIOs – show that there is “limited empirical evidence” that a Scottish Government Bond will have that effect.  

Knowing how much the current administration prays at the altar of Foreign Direct Investment we expected that the motivation would be around foreign finance. But our FIOs throw up something we didn’t expect. Considering the SNP is running an independence-focused Holyrood campaign, the wholesale bond programme did not consider the impact of Scottish independence. At all. On a ten-year bond!

So it is worthwhile pausing because we have not explained this anywhere as clearly as this. 

The decision was to walk away from UK government funding (via the NLF) and to issue a wholesale bond in 2026, which will likely be repaid in 2036. And no one in the administration thought about what would happen to the debt if we became independent. 

Now you can draw your own conclusion about what this says about this administration. Jim and I wrote: 

“That the Scottish Government could pursue a decade-long debt issuance process that ignores the potential of Scottish independence is likely to provide ammunition for the charge that the administration is not seriously considering independence. If, however, it is working towards independence, then surely this shows that the Scottish Government is taking unnecessary risks by ignoring the impact of foreign-currency debt? The authors are not sure which charge is the worst.”

The plan is to borrow £3bn over ten years, so we are past the ‘chicken feed’ amount here. But stepping beyond the appalling economics of interest payments, there are other concerns.

There is no ‘institution building’ within the Scottish Government that takes advantage of this wholesale issue. The bonds encourage the ownership of Scottish assets. A figure, perhaps in the region of £10 million, will flow to the City of London for the privilege of paying more interest to international investors. It is entirely unnecessary. But the biggest concern is one we kept out of the report. 

Bella Caledonia asked the Scottish Government for a response to these criticisms. A Scottish Government spokesperson said:

“The Scottish Government’s bonds programme is about using the powers we have to borrow better – not more – by structuring debt more effectively.”

“It will help in our aim to make Scotland the most attractive destination for investment in the UK, and diversify sources of borrowing to maximise value for money for Scotland’s taxpayers.”

“While specific issuance plans will be subject to market conditions closer to the time, these bonds will raise the funding needed to support delivery of the capital infrastructure projects outlined in our recently published Spending Review and Infrastructure Investment Pipeline.”

The Scottish Government has set an awful political train in motion 

Currently, the credit ratings agencies have rated Scottish Government bonds using the methodology of a ‘sub-national government’. As the UK is there to backstop any sub-national institutional lending, you get the same rating as the Sovereign state, and the market will add a small interest premium. 

Scottish Ministers have been at pains to say, and I quote from a Scottish Government press release: “Last year the Scottish Government was given the same high credit rating as the UK, and better than Spain, Italy and Japan.” That is true because we are being judged as part of the UK. However, as Scottish independence becomes more likely, credit ratings will fall, and interest payments on new bonds will rise. This is guaranteed. This isn’t economic opinion. The methodologies used by credit agencies will start adding in ‘default’ risk’. And what an Almighty mess will ensue. 

See the headlines?

“Scottish Bonds collapse after announcement that independence is likely.” 

“Markets show disdain for Scottish Independence as Scottish Bonds fall in value.”

“The Decision to consider independence has already cost the Scottish Government £X million.” 

It is political suicide. 

The Scottish Government is punching itself in the face and paying upwards of £170 million to international capital markets for the pleasure. 

We tried to keep to the economic argument in our report, staying slightly into discussions of institutions and independence, but we didn’t cover the political fallout of independence on bond prices. 

However, as we considered the paper’s response, it has become clear that our call for a pause in the bond programme is more urgent. Add this political dimension to our argument, and we challenge anyone to suggest this is in the best interests of the SNP, the independence movement, or Scottish households and businesses.

So what now?

We have drafted an email for people to send to their MSPs, and we encourage readers to follow the link, read the report, the executive summary may be enough, and contact their MSPs. We know that more than a dozen people have received answers from their MSPs so far, so we think there is perhaps a pent-up frustration in the chamber about this particularly crazy idea.

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