UK allows Scotland to issue its own debt - at a price

Britain's Chancellor of the Exchequer Osborne delivers a speech on the forthcoming Scottish independence referendum in Edinburgh in Scotland

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Britain's Chancellor of the Exchequer George Osborne delivers a speech on the forthcoming Scottish …

By David Milliken

LONDON (Reuters) - Britain's government granted Scotland the power to raise debt in its own name on Wednesday, in a move aimed at showing Scots that they can enjoy some benefits of independence while remaining part of the United Kingdom.

Scotland votes in September on whether to dissolve the 307-year-old union with England, and last week British Chancellor George Osborne said an independent Scotland would be unable to keep the pound, independence campaigners' preferred option.

Scotland's First Minister Alex Salmond responded that this was against Britain's own economic interests, and that an independent Scotland might refuse to take on its share of Britain's debt if it is not part of a formal currency union.

Wednesday's announcement allows Scotland to issue a modest 2.2 billion pounds of sterling-denominated bonds, which will not be backed by the rest of Britain, instead of borrowing money via the UK government as at present.

"Being able to issue its own bonds gives Scotland new powers and new responsibility, within the security of the UK," Osborne said. "Alongside the considerable new tax and spending powers we have already given ... it is further evidence of why being part of the UK gives Scotland the best of both worlds."

U.S. cities, German states and Canadian provinces all issue bonds independently of their federal governments, but to date administrations in Scotland, Wales and Northern Ireland have had little fiscal independence from London.

However - in a move which hints at the political overtones of Wednesday's announcement - Britain's finance ministry warned Scots that they would probably have to pay more interest if their pro-independence Edinburgh government chose to raise funds without a British government guarantee.

"Access to (existing finance) already allows the Scottish Government to benefit directly from the UK's low costs of borrowing. Issuing its own debt is unlikely to be as cheap," the ministry said in a statement.

A finance ministry report in May, which sought views from the Scottish government and investors about Scottish bonds, said Scotland might have to pay 0.3-1.2 percentage points more than the British government to borrow from financial markets.

Existing funding arrangements charge Scotland about 0.2 percentage points extra.

Those in favour of allowing Scotland to issue its own bonds said it should be for Scottish politicians to decide the most cost-effective source of funding, and that the premium over British government bonds would fall over time as Scotland demonstrated itself to be creditworthy.

Scotland's government says it would have stronger finances than the rest of the United Kingdom after independence, as it expects to inherit most of Britain's North Sea oil and gas.

($1 = 0.5989 British pounds)

(Reporting by David Milliken; Editing by Robin Pomeroy)

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