Scottish independence – would I end up with Scottish gilts? And would I want `em?

The pollsters reckon that the Scottish National Party will become the single biggest party in Scotland following the elections later this week. This has understandably led to thoughts that a subsequent referendum could result in a majority in favour of leaving the 300 year union between England and Scotland, and have Scotland becoming an independent state within the EU. This led me to think that the billions of pounds of UK government gilts we own in our portfolios might end up being something very different by the time that they mature. As in any divorce, a breakup of the UK will lead to some redistribution of assets and liabilities (I remember the Czech and Slovak governments arguing over who got the tastiest embassies after their separation). Scotland accounts for around 9% of the UK population, and slightly less as a share of GDP, so would 9% of my gilt portfolio turn into Scottish Government Bonds overnight? And would Scotland adopt the Euro, in which case the yield on those Scottish bonds might fall from over 5% (UK 10 year yields) to 4.3% (EU 10 year yields), or would they create their own Scottish Pound, in which case you might guess that yields would rise on account of newness and uncertainty. On a stand alone basis would the Scottish economy be AAA rated like the UK? Would Scottish ratings be helped by oil revenues? Or would they suffer to reflect a mediocre GDP record and static population growth? I don’t know the answers, but I’ll want to as the prospect of independence grows. In the meantime, William Hill is offering 101 to 1 on Scottish independence by May 2012, which might be worth a very small wager. 11 to 1 by 2057 sounds a much better proposition, although 50 years worth of inflation and counterparty risk probably erode the attractiveness of the bet.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

Job Title: CIO Public Fixed Income

Specialist Subjects: Macro economics and fixed interest asset allocation

Likes: Cycling, factory records, dim sum

Heroes: Brian Clough, Morrissey, Neil Armstrong

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