Despite the insistence of Scottish first minister, Alex Salmond, that Scotland could continue to use sterling informally if it seceded from the United Kingdom, this would not be a viable option claims Currencies Direct.
Salmond has said that an independent could emulate Scotland Jersey, Guernsey and the Isle of Man and retain the British pound. However, the currency exchange payment provider rules out the possibility and says the two routes open to Scotland are either creating its own currency or a formal union with sterling, or alteratively the euro.
The rationale behind discounting informal union is that Scotland as a sovereign state with an advanced economy – as opposed to a dependent territory – will need full control over its monetary policy and the ability to provide liquidity to its financial sector if it is not to fall into economic decline.
Alternatively, creating its own currency will involve an arduous set of hurdles that the fledgling country would find difficult to clear in the near future
“Setting politics aside, without a doubt the best long-term option is setting up a Scottish currency with a floating exchange rate,” said Alistair Cotton, Currencies Direct’s head of corporate dealing. “It gives Scotland full control over its finances and allows for flexibility as economic imbalances build – particularly useful if oil receipts are to form a key part of the Scottish economy.
“But it will impose enormous short-term costs and logistical challenges, which would be circumvented by joining either sterling or the euro. As the former appears to be increasingly unlikely and the latter is unpopular with voters, Mr Salmond is caught between a rock and a hard place.
“In the short term, publishing a roadmap showing how exactly he plans to launch a currency within 18 months would assuage a great deal of uncertainty in the market. However, whether that is possible is another question entirely.”
Currencies Direct outlined the 10 steps to creating a Scottish currency:
- Found a new central bank, regulator and payments system: Emulating the Bank of England (BoE) is a formidable challenge, with a huge expenditure attached. Creating a Scottish ‘Old Lady of Threadneedle St’ will not only require internationally-recognised financiers to run it, but potentially years of planning to put the correct systems in place.
- Print a new currency: This will be backed by the Scottish Central Bank, with credit created by private banks.
- Establish a Scottish government bond market: This was recently announced and is key to enabling government borrowing.
- Honour UK government bonds: Apportion a sizeable amount of pre-independence UK government bonds to be to be honoured, directly or indirectly, by the Scottish government. This will instil the necessary confidence the market requires to lend to the Scottish government on a long-term basis.
- Break the existing banking union between Scotland and the UK: A negotiation will need to take place over which banks fall under the jurisdiction of the Scottish Central Bank and regulators. Could Scotland support Royal Bank of Scotland (RBS’s) liabilities itself? Would the investment arm remain in London and split from the Edinburgh retail arm?
- Win over domestic financial institutions: The Scottish government will need to get the domestic banking system on side, willing to lend in the new currency, which will require significant liquidity from the Central Bank.
- Redenominate all existing sterling contracts into the new currency: This includes everything from Scottish mobile phone bills, to hospital public/private finance (PPF) deals, via loans, bonds, shares, derivative contracts, and business and consumer contracts. This herculean project will require a complete review by the government and arbitrary calls taken on which contracts are converted and why.
- Create a supporting legal framework to settle contracts: As potentially time-consuming as the project above.
- Launch a nationwide PR campaign: A public relations campaign to convince businesses and consumers to borrow in the new currency will be a must. It is vital all stakeholders buy into the new currency and the institutional framework underpinning it.
- Create a deposit guarantee scheme: Necessary to halt capital flight – capital controls will prevent savers and investors from moving their funds out of the Scottish currency and into those that may inspire more confidence. This would involve the new Scottish Central Bank creating a new deposit guarantee scheme.