NEARLY three years ago, in the Scotsman, I considered the currency options facing us after a yes vote. “An independent Scotland,” I suggested, “might end up with Airdrie Savings Bank as its biggest locally-owned bank ….. and a (paper) currency with Bank of England printed on it. Quite a political sell that one”. You can read the whole piece here. With less than a week to go, both my forecasts are now looming large. If there’s a yes vote. Here’s how.
This week five Scottish-registered banks – RBS, Lloyds (which includes Bank of Scotland), Clydesdale, the new TSB, and Tesco Bank – all confirmed contingency plans to place their registered headquarters south of the border. There’s been much talk of brass plates being unscrewed from doorways in Edinburgh and Glasgow, and pinned up instead in the City of London or, in Clydesdale’s case, Leeds.
But this is about more than shiny bits of metal. It means, if implemented, that control and regulation of all these banks will switch to a separate jurisdiction. The branches, ATMs and some of the call centres will still be here. But these banks will become foreign banks. All big decisions about them will, in future, be taken in another country. Add in Santander, controlled from Spain, and Airdrie Savings Bank is left as the biggest bank an independent Scotland could call its own.
Since the great crash, both RBS and Lloyds have racked up vast losses. So it will be years before they’re paying significant taxes on their corporate profits again. But whenever that happens, a switch in domicile means that tax will go straight to the London Treasury. In addition all big banks are big spenders on all sorts of things, from branch refitting to new computer systems. The bulk of the unrecovered VAT on all that spending would also go to the rUK Revenue.
And if the rUK government persists in its refusal to agree a formal sterling currency union with an independent Scotland it will almost certainly be the end of distinctive Scottish banknotes too. Since 1845 RBS, Bank of Scotland and Clydesdale have been authorised to issue their own notes. An equivalent arrangement covers four banks operating in Northern Ireland.
These notes aren’t technically legal tender. But the Bank of England, as the UK’s central bank, allows them to circulate provided the issuing banks place an equivalent amount of Bank of England notes and coins with it or in other secure storage. The idea is that, if one of them goes bust and its notes prove worthless, holders can be reimbursed from these reserves.
In February of this year the three Scottish banks had £4.1bn of their own notes in circulation. So currently they have to hold at least that amount as reserves. However if there’s a yes vote and the Scottish banks go through with their contingency plans and move their registered HQs to London and Leeds, why would they persist in issuing distinctive Scottish banknotes? Replacing such notes with the Bank of England’s own paper would release at least £4.1bn held in reserves. In the turmoil that would almost certainly attend that transition, releasing that much money could prove very useful.
If the SNP persists with its claim that “It’s our pound too and we’re keeping it”, then the notes it will almost certainly have to use in the so-called sterlingisation option will be Bank of England fivers and tenners not the familiar Scottish alternatives. Panama really does use the American greenback. Ironically the pound in our pockets then really will then say Bank of England. Not Scotland. And without a central bank of our own, we’ll be forced to find tens of billions in reserves to match Denmark and Hong Kong who shadow the euro and the dollar respectively.
They tell us a formal currency union with rUK will happen anyway, because everyone from George Osborne to Mark Carney is bluffing. But, as the plight of the eurozone has spectacularly demonstrated, currency unions that don’t involve a high degree of political and fiscal convergence simply don’t work. If that’s what you want, you’ve already got it. It’s called the United Kingdom. Why go through years of brokering independence to get back to where you started?
That sterling union it so craves isn’t even the SNP’s preferred option for the medium term. In the words of its own fiscal commission “It’s a practical option for Scotland immediately post-independence”. The real objective is to a create a breathing space. Scotland would keep its options open for the medium term. As the commission puts it: “Establishing an independent currency would allow the greatest policy activism and discretion for Scotland.” You’ll find my fuller analysis of this here.
The yes campaign that says it craves a continuing currency union with rUK is actually on the look out for a short-term fix. And, in pursuit of that, its tactics have been willfully reckless. Back in January 2012 when Alex Salmond was pressed by Jon Snow on Channel4 News about how much of the the UK government’s £187bn exposure to RBS Scotland would shoulder, if it became independent, he refused to shoulder any. Our first minister apparently believes that the UK Treasury caused RBS’s collapse in the first place.
Salmond who, on assuming office in 2007, offered Fred Goodwin “all assistance my office can provide” and “good luck” on pursuing RBS’s disastrous consortium bid for ABN-Amro, was telling an American audience by March 2008 that RBS and Bank of Scotland proved Scotland had “global leaders, today, tomorrow and for the long term”. By August of that year, RBS had revealed a whopping £692bn loss while taking a further £12bn from its shareholders in a still-contested rights issue.
But that didn’t stop Salmond from issuing a Scottish government press release, still describing the bank he once worked for as “one of the highest performing financial institutions in the world”. It would, he opined, “overcome current challenges to become highly profitable and highly successful once again.” Before that year was out RBS was bust.
At the beginning of this year, to reassure markets, the UK Treasury made it clear that, whatever the outcome of the referendum, it would honour all of UK’s outstanding debt (gilts). When George Osborne then came to Scotland to confirm what the UK Treasury had signalled two years earlier – that there would be no formal currency union with an independent Scotland – our first minister immediately threatened to walk away from Scotland’s share of the UK’s accumulated debt.
This week Jim Sillars – for years at daggers drawn with Salmond, now standing shoulder-to-shoulder in the campaign – threatened businesses that dare warn about the implications of a yes vote for them with “ a day of reckoning”. BP risked being nationalised. Banks moving their domicile to England would be broken up. Retailers, like the John Lewis Partnership, talking of price rises, would face mass boycotts.
Is the man who still thinks Salmond’s sterling currency union is “stupidity on stilts” serious? How would an independent Scotland nationalise a global oil company headquartered in London? Or would it just grab its North Sea assets? And if it did, how would it operate them? How do you break up banks that have already redomiciled in London and Leeds? This is Scotland, not Zimbabwe.