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Scotland Plans to Sell Bonds in International Markets, Asserting Credibility for Eventual Independence

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Scotland’s pro-independence government has announced plans to sell bonds in international debt markets for the first time, in an effort to demonstrate its credibility among investors and pave the way for potential independence from the United Kingdom. The head of the devolved government, Humza Yousaf, stated that the sale of these Scottish bonds, humorously referred to as “kilts” as a play on gilts, the nickname for British government bonds, will occur by the end of May 2026.

Yousaf revealed that the funds raised from the bond sales would be utilized for infrastructure projects. While the exact amount that the bond sales might generate remains unknown, it is expected to be relatively modest. Scotland has had the authority to issue bonds since 2015 but has not yet exercised this capability.

Before proceeding with the bond sales, the Scottish government will need to establish the legal terms of the sales plans. Additionally, it will likely seek a credit rating from reputable ratings agencies such as Fitch, Moody’s, or Standard & Poor’s to provide potential investors with an assessment of the risk associated with buying Scottish bonds.

Unlike their counterparts in the United States and certain regions of mainland Europe, British cities, and administrations in Scotland, Wales, and Northern Ireland possess limited independent powers of taxation and do not issue tradeable bonds. The UK finance ministry has been reluctant to authorize bond issuance by other authorities due to concerns that taxpayers throughout the UK would bear the burden of bailing out defaulting cities and regions.

Governments that sell debt offer interest rates to investors that reflect the market’s evaluation of the risk of potential future defaults, in addition to other factors. If Scotland’s planned bonds are backed by the British government, which boasts a longstanding market reputation, the risk premium for Scotland would be less expensive.

Mairi Spowage, director of the Fraser of Allander Institute at the University of Strathclyde, suggested that under legislation outlining Scotland’s relationship with the UK, she believed the UK finance ministry would ultimately guarantee the debt. Russ Mould, investment director at AJ Bell, explained that investors would consider the risk of Scotland’s secession from the UK, as desired by the Scottish National Party (SNP), including the potential adoption of the euro if independence were achieved.

Currently, Scotland borrows from the UK National Loans Fund (NLF), the British government’s borrowing and lending account. Spowage noted that approximately 75% of Scotland’s cumulative £3 billion cap for capital borrowing has already been utilized. This leaves around £750 million for additional debt, either through bond sales or loans from the NLF, which are likely to offer more favorable terms.

To provide some context, the UK is projected to borrow around £240 billion in the 2023/24 fiscal year through gilt sales.

These developments mark a significant step towards Scotland’s pursuit of financial autonomy within the UK, while also testing the waters for potential independence in the future. The sale of Scottish bonds will serve as a litmus test for investor confidence in Scotland’s economic prospects and its ability to stand on its own should it ultimately achieve independence.

More detail via Reuters here… ( Image via Reuters )

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