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Och aye the nooo!
Scottish independence is unlikely to have rating implications for the UK sovereign, given Scotland’s small size relative to the UK’s economy and an independent Scotland’s likely investment-grade credit profile, says Moody’s Investors Service.
The ratings agency said that the main risks to this assessment are (1) the division of the UK’s debt obligations; and (2) the continued uncertainties associated with the currency arrangements put in place post-independence. Independence also has limited rating implications for domestic issuers registered in Scotland, though the impact of redenomination is uncertain.
Three separate reports examine (1) the impact a “Yes” vote for Scottish independence would have for UK sovereign creditworthiness; (2) the range into which the rating of a newly independent Scottish government might fall; and (3) the implications this would have on issuers registered in Scotland from a range of sectors including banking, insurance, utilities, infrastructure, project finance, oil and retail. Subscribers can access these reports at the end of this press release.
Overall, given the small size of Scotland’s economy relative to that of the remainder of the UK and Scotland’s likely investment-grade credit profile, any credit impact (negative or positive) from Scottish independence on UK sovereign creditworthiness is likely to be limited. In terms of credit positive elements, Moody’s notes that Scottish independence would eliminate the current fiscal transfers between Scotland and the remaining regions of the UK, marginally improving fiscal dynamics for the remainder of the UK given higher Scottish per capita public expenditures and Scotland’s older demographic profile. Any division of revenues from North Sea oil would be largely credit neutral for the UK sovereign given that they are small, and declining, relative to the size the UK economy.
Potential risks to this assessment arise if Scotland refuses to assume a “fair and proportionate share” of its debt obligations, which would increase the UK’s net debt burden and would be considered credit negative. In addition, a potential currency union with the remainder of the UK would be credit negative if it were to materialise. However, cross-party opposition to such an outcome makes this unlikely. Scotland’s adoption of an independent currency would be credit neutral for the UK.
Moody’s says that Scotland’s credit profile would almost certainly be consistent with an investment grade rating. While there are significant uncertainties associated with Scottish arrangements post-independence, an ‘A’ rating is perhaps the most likely at the outset, but with risks tilted to the downside. Over time, greater clarity over (and confidence in) Scotland’s institutional structure and measures to address longer-term fiscal issues could make higher rating levels attainable.
An assessment of an independent Scotland on those issuers registered in Scotland covers three broad factors: (1) the impact of redenomination on outstanding debts in a new currency, given Moody’s expectation that the UK authorities would likely persist in their refusal to tolerate a currency union with an independent Scotland; (2) the constraints on borrower creditworthiness coming from an independent Scotland’s credit profile; and (3) any impact the economic and financial environment in an independent Scotland might have on borrower on creditworthiness.
Of these, the first could have the most immediate significance for ratings, at least for bank deposits, many of which would need to be redenominated into a new currency that might not possess the external purchasing power of sterling. Beyond redenomination, however, it is unlikely that independence would have widespread material credit or rating implications. That being said, in each case Moody’s would need to assess the issuer’s Scottish footprint, and what that might mean for creditors and for its rating.
