Peter Ryan, the author of the Common Weal's paper Backing Scotland's Currency, explains why his findings are a vital part of the discussion on independence

A QUESTION often raised with respect to an independent Scotland having its own currency is the ability of Scotland to support that currency.

Whenever the subject is mentioned, we have prophets of doom speculating that a Scottish currency would collapse in value shortly after it floated and that an independent Scotland would be too poor to prevent this happening.

The Scottish Daily Express even jumped on a previous currency paper that formed part of Common Weal’s White Paper Project to put on their front page: “£10bn to set up new Scottish currency”. The right-wing pro-Union paper blurted out: “The astonishing admission is yet another huge body blow to Nicola Sturgeon’s attempts to break away from the UK.”

REPORT: HOW INDY SCOTLAND COULD BACK UP ITS CURRENCY

So it’s important to set the record straight. In my paper, Backing Scotland’s Currency, I demonstrate that it would be perfectly possible for an independent Scotland to have sufficient foreign exchange reserves to support its own currency.

One point that needs to be understood in relation to foreign exchange reserves is that central banks (the Bank of England, the European Central Bank, the Federal Reserve etc) are not in competition with each other. Instead they work together to ensure stability in financial markets.

In relation to Scotland, it would not be in the United Kingdom’s interest to see a fall in the value of the Scottish currency.

For example, based on figures from the Council of Mortgage Lenders, there is around £63,000 million of outstanding debt on Scottish mortgages. Following the introduction of a Scottish currency this mortgage debt would be redenominated in the new Scottish currency.

Much of this debt would be held against United Kingdom banks whose balance sheets are in sterling. If the Scottish currency fell by, say, 10 per cent this would wipe billions of pounds off the value of UK banks (and remember this is just mortgage debt and does not include personal loans, business loans, etc).

So it would be in the interest of the UK financial services industry to maintain the value of the Scottish currency.

In the case of Scotland, I have modelled how the necessary foreign exchange reserves could be built up.

The first step to this was a decision about how much foreign exchange reserves was needed. For the purposes of comparison I looked at European Union countries that were not members of the euro.

The size of foreign exchange reserves is a matter of monetary policy of the country.

Within these countries there is a range of levels of foreign exchange reserves: from 5.69 per cent of GDP in the UK to more than 40 per cent of GDP for countries such as Bulgaria or the Czech Republic.

For the purposes of this paper, a more typical sum of 20 per cent of GDP was used, which for Scotland is approximately $40bn (approximately the same value of foreign exchange reserves as Denmark).

I then looked at raising the foreign exchange reserves as follows: l The current value of the UK foreign exchange reserves is $162,952 million. Taking 10 per cent of this figure as Scotland’s share in a fair asset and debt settlement would give a figure $16,200m.

l Next, the production of the physical Scottish currency and exchanging this for physical sterling would net the Central Bank of Scotland approximately $2,900m (assuming half of the physical sterling currency in circulation in Scotland is exchanged for new Scottish currency).

l I then propose a foreign exchange swap between the Scottish Central Bank and Bank of England when centrally issued Scottish currency is exchanged for sterling in a mutually beneficial agreement to support both currencies.

This would raise around $13,000m for Scotland’s foreign exchange reserves.

l Finally, I propose raising $8800m million by issuing central bank securities. Remember, this would not be debt as the amount raised would be re-invested on the sovereign debt markets to gain a return.

This model raised $40.23bn of foreign exchange reserves for Scotland which would be enough to support a Scottish currency based on the country’s current GDP and economic output.

These methods are all commonly used by central banks all over the world to ensure the stability of their currency.

This calculation uses the assumption that RBS would be a UK bank. If the bank was split between UK and Scotland or wholly Scottish-owned the numbers would be different.

However, in both cases the numbers are achievable and the difference is set out in the paper.

In all scenarios there is no reason an independent Scotland could not raise sufficient foreign exchange reserves at the time of independence to support its own currency.