In the light of recent views from the NIESR suggesting that a formal currency union between Scotland and the UK would be neither practical nor desirable post-independence, Alistair Cotton, Currencies Direct’s head of corporate dealing, comments on these warnings.
“I agree with the NIESR that if Scotland kept the pound, a formal currency union with the UK would be impractical and the best option for an Independent Scotland would be to create its own currency.
“The baseline scenario for a currency should be ‘what happens in a crisis’, and the answer should be that the Central Bank stands behind the currency as buyer of last resort.
“Sharing the Pound means that institutional framework will not exist, so the government will need to be very fiscally responsible and hope that the market continues to allow the government a reasonable interest rate.”
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Please see below an outline of how Scotland could create its own currency.
The 10 steps to creating a Scottish currency:
1. Found a new central bank, regulator and payments system
Emulating the Bank of England 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.
2. Print a new currency
This will be backed by the Scottish Central Bank, with credit created by private banks.
3. Establish a Scottish government bond market
This was recently announced and is key to enabling government borrowing.
4. 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.
5. Break 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 RBS’s liabilities itself? Would the investment arm remain in London and split from the Edinburgh retail arm?
6. 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.
7. Redenominate all existing Sterling contracts into the new currency
This includes everything from Scottish mobile phone bills, to hospital 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.
8. Create a supporting legal framework to settle contracts
As potentially time-consuming as the project above.
9. 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.
10. 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.