By David Milliken
LONDON (Reuters) - The United Kingdom would need longer to recover the triple-A debt rating it lost last year if Scotland votes for independence in September, ratings agency Fitch said on Thursday.
Fitch said London's promise to honour all existing United Kingdom debt in the event of independence and seek recompense from the new Edinburgh government would raise the United Kingdom's debt burden as a share of gross domestic product by almost 10 percentage points.
Last month Fitch identified Britain's high debt ratio - which stands at 91 percent of GDP on the EU measure preferred by ratings agencies - as the main barrier to restoring the top-notch debt ratio which Chancellor George Osborne pledged to defend when he came to power in 2010.
"The UK's gross debt ratio will need to be lower than its current level and steadily declining before any upgrade back to AAA, a prospect that would be delayed by such a debt shock," Fitch said in a statement.
Both Fitch and Moody's downgraded Britain one notch from triple-A last year, while Standard & Poor's continued to award Britain its top rating for creditworthiness. The downgrades had little impact on Britain's borrowing costs, though they were an embarrassment for the government.
Scottish nationalists have said they will repay a fair share of United Kingdom debt if Scotland becomes independent, which Fitch said it expected would be done in the form of a long-term loan agreement between London and Edinburgh.
However Fitch said such a loan would not be counted as a standard asset to be offset against the United Kingdom's existing debt obligations.
"We assume that Scotland would gradually repay its loan to the UK. However, it would be illiquid and leave the UK exposed to Scottish credit risk, at least in the early years of independence," it said.
Separately, Britain's finance ministry said Scotland would have the second-highest budget deficit among advanced economies at the likely date of independence.
Last month researchers at the University of Glasgow forecast that Scotland would have a budget deficit of 5.5 percent of GDP in 2016, when independence would be likely to take effect.
This is around 2 percentage points higher than estimates from the Scottish government in September, which the Glasgow researchers said significantly underestimated the pace at which tax receipts from North Sea oil and gas would decline.
An independent Scotland would be likely to inherit most of Britain's oil and gas reserves, which lie off the Scottish coast, but this previously large source of tax revenue is now in steady decline as reserves become costlier to extract.
Britain's finance ministry - which has put out a stream of reports arguing against independence - said forecasts from the International Monetary Fund earlier this week showed that only the United States would have a larger deficit.
"While holding the world's reserve currency enables the U.S. to sustain higher than normal fiscal deficits, the experience of the euro area crisis shows that ... markets would be unlikely to have such confidence in an independent Scotland," it said.
Britain's budget deficit currently stands at around 6.6 percent of GDP, but the government forecasts it will drop to 2.4 percent by the 2016-17 tax year.
(Editing by William Schomberg and Toby Chopra)
- United Kingdom