First Minister’s plan to issue bonds takes the SNP’s financial ineptitude to new heights
Source - Daily Telegraph - 21/10/23
It runs a budget deficit of 9pc of GDP. It has no idea what currency it wants to use. It has a track record of epic financial mismanagement, and its former leader has been arrested over an investigation into missing party funds.
But, heck, never mind any of that. Humza Yousaf, the leader of the SNP, has decided that Scotland should start issuing its own bonds. If it happens, Zimbabwe and Argentina may have some competition for the worst credit rating in the world.
Scottish bonds, or “kilts” as they are already known in the financial markets, will prove a catastrophe. There is no more brutally honest judge than the bond market, and even if he doesn’t realise it, Yousaf has just killed off the prospect of Scotland breaking away from the United Kingdom forever.
It may have seemed like a grand announcement for his first party conference speech as leader of the Scottish National Party. This week, Humza Yousaf revealed plans for Scotland to issue its own debt. Under rules drawn up after the last independence referendum, Scotland has the power to borrow up to £450m a year, and £3bn in total.
“Scotland has a wealth of investment opportunities,” the First Minister grandly announced. “Issuing a bond will help raise Scotland’s profile and engagement with international investors to attract investment.”
Well, perhaps. For Yousaf and his beleaguered administration in Edinburgh, lg bonds for the first time may have some appeal. It will demonstrate that the country has the capacity to operate on its own financially.
And of course, it will give the devolved administration some extra cash to spend on bottle recycling, or rent controls, or gender transition clinics, or whatever madcap, virtue-signalling scheme happens to catch its fancy that week. It hasn’t had much luck with imposing extra taxes so far, so perhaps it can just borrow the money instead.
Here’s the problem, however. If Yousaf thinks that the bond markets will be in any rush to lend him a few extra hundred million every year, he is surely making a big mistake. There are so many reasons why Scotland is a poor investment, it is hard for even its most diligent critics to keep track of them all.
Its budget deficit hit a peak of almost 23pc during the pandemic, and it is still running at 9pc of GDP – double the level of Italy. Its economy is contracting, with a 0.3pc fall in GDP in the second quarter of this year, compared to modest growth for the UK as a whole.
It has declared war on the North Sea oil and gas industry, even though it is the most secure part of the country’s tax base, and potentially a huge money spinner for the government. It has raised taxes significantly above those in England, threatening a brain drain as well Edinburgh’s crucial role as a financial centre.
Its record on major public projects is one of waste and inefficiency: the cost of new ferries for the islands, to take just one example, is so far over budget it makes HS2 look well-run by comparison.
And of course, its former leader Nicola Sturgeon was arrested over missing party funds. Add it all up, and it hardly looks like a reliable home for your cash. When you could be lending money to the governments of, say, Switzerland or Germany, it is very hard to see why you would want to offer it to Humza instead.
In reality, there are two big problems with the plan. To start with, Scotland’s credit rating will be terrible. We can forget about whether it is a single or double A. The alphabet doesn’t have enough letters to capture how poor a risk it will be: the CCC that is traditionally the lowest possible score does not begin to capture it.
Next, although Yousaf almost certainly hasn’t noticed, the bond markets have been in turmoil over the last two months, with yields soaring even for US Treasury bills, the safest asset in the world.
Issuing “kilts” would be a terrible idea at the best of times. Trying to do so at the moment when every major government in the world is struggling to raise cash, and roll over existing debts, and are being forced to pay more and more to do so, surely takes the SNP’s financial ineptitude to new heights.
The blunt truth is this: even though they will be ultimately guaranteed by the government in Westminster, and presumably back-stopped by the Bank of England, the “kilts” will trade at permanent discount to the better established “gilts”, and even those are hardly being snapped up by investors right now.
Investors will need some compensation for the risk that Scotland might break away from the rest of the UK one day, and their bonds may be repriced in a different currency, the details of which are yet to be revealed.
Even worse, even if there is not much sign of it right now, if there is a surge in support for independence, or another referendum looks on the horizon, the bonds will collapse in value.
In truth, the “kilts” will be a harsh, daily reminder, evident on every trading screen in the City, of just how ruinously expensive, and high risk, independence will be.
Scottish independence does not look very likely right now. Support for the SNP is collapsing in the polls, with the Labour Party set to retake many of its lost seats. The nationalists are split, and embroiled in a range of scandals. Our departure from the EU, once seen as a winning argument, is disappearing from memory, and no longer has the potency it had in the aftermath of the referendum.
The prospects of Scotland breaking away were already fading. But with his plans for Scottish bonds, Yousaf has surely just killed it off for good.
The bond markets are a harsh judge of any political project. And as soon as the “kilts” are trading, Scottish independence will be financially toxic. If he gets the bonds issued, the SNP may raise a few extra million – but they will destroy any prospect of independence.
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