AN independent Scotland would be able to raise more than $40 billion in foreign currency assets to support a Scottish pound, according to a new report.

Backing Scotland’s Currency, published today, is the latest in the White Paper Project series of studies by the Common Weal, a think tank working on new arguments for self- determination.

Written by Peter Ryan, an IT expert in the financial sector, it assesses the value of foreign currencies held by small European nations outside the eurozone and explains how an independent Scotland could establish the reserves needed to guarantee its currency’s stability.

Ryan suggests the figure should be similar to that of Denmark which has foreign currency reserves of $4bn, equivalent to 20 per cent of GDP.

The UK’s level is 5.69 per cent.


Responding to attacks on whether a Scottish central bank could raise suf- ficient foreign reserves, Ryan said: “It’s important to set the record straight. In my paper I demonstrate that it would be perfectly possible for an independent Scotland to have sufficient foreign exchange reserves to support its own currency.”

Ryan calculates Scotland could raise $40bn through a combination of transactions, including claiming a 10 per cent share of UK reserves of $163bn – ie, $16.3bn.

In addition to that $16.3bn, a further $13bn, he says, could be raised via a foreign exchange swap with the Bank of England to aid the mutual stability of the economies of Scotland and of the rest of the UK.

Another $8.8bn could be raised via the issue of a Euro bond and half of the £4.5bn-worth of hard sterling held by a new Scottish central bank could be used to buy the remaining amount.

The argument over currency is likely to be a key factor in any new independence referendum.

Retaining sterling, as the SNP suggested in 2014, is regarded by some as a weakness in the Yes side’s argument after the then chancellor George Osborne said he would stop Scotland from using it.

Since then, some independence supporters have set about reviewing the policy and come up with more convincing arguments.

Weeks after last year’s Brexit vote, investment bank JP Morgan said it expected Scotland to vote for independence and introduce its own currency. Economists have different views about whether a high level of foreign currency reserves is essential.

Dr Jim Walker, chief economist of Asianomics, said while it was “absolutely correct” that an independent Scotland could raise $40bn in foreign reserves, it was also “absolutely unnecessary”. He described the Common Weal report as a “well-thought-out contribution”, but said many successful independent countries had levels of reserves considerably smaller than 20 per cent of GDP.

“The Czech Republic, until the last two years, had historically a substantial current account deficit making the currency much more vulnerable,” he said. “For Bulgaria that was also historically true but not in the last decade. However, these reserve levels [at 40 per cent GDP] are a result of past deficits. Scotland would run a large surplus.

“Two ‘small’ non-European players with open capital accounts and free-floating currencies, Australia and New Zealand, maintained reserves of 4.5 per cent of GDP and 10 per cent of GDP, respectively, for 2016.

“There is absolutely no need [for an independent Scotland] to be aiming at a 20 per cent of GDP reserve level.”

Ryan also points out that in relation to foreign exchange reserves central banks are not in competition with each other, but work together to ensure stability in financial markets.

He argues that in an increasingly connected world it is not in anyone’s interest to have economic instability in a trading partner and cites the situation when there was concerted action by all the central banks of the G7 countries to prop up the Japanese Yen after the 2011 earthquake.

Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research, said: “The ability of a Scottish central bank to raise the funding and then defend the new Scottish currency will depend on persuading investors that Scotland can defend the exchange rate. There is no reason why any country cannot do this.”

Armstrong added that if a country runs persistent deficits then it will have to borrow persistently and at some point foreign investors might test the ability to borrow, potentially leading to a fall in the value of the new currency.

“The easiest way for the Scottish Government to gain credibility with investors is to prove that they can run surpluses,” he added. “They should do this before independence as a signal of their ability to borrow and save to remove any issue of repayment. A government surplus would probably mean a current account surplus which would again assure investors. If an independent currency is the plan, I would urge the Government to start demonstrating its ability to run surpluses before being asked to do so by the market.”

Backing Scotland’s Currency is the third study by the Common Weal to address questions around a new currency for an independent Scotland.

The first report concluded the best choice was for the country to launch its own currency, while the second explained details of how an independent Scotland would do so. Ivan McKee, a SNP member of Holyrood’s finance committee, said: “This is a valuable contribution to the debate around a potential currency for an independent Scotland. It shows that there are a range of potential options available and that this particular solution is perfectly workable. I welcome the work that has been done to prepare this report which feeds into the wider debate on this issue.”

Robin McAlpine, Common Weal director, said: “Building up a foreign currency reserve has been one of the issues which opponents of independence have put forward as an imposs-ible or prohibitively difficult barrier to establishing a Scottish currency.

“This carefully argued, well-informed paper makes clear how straightforward it would be to achieve. The more we build the case for an independent Scottish nation state, the more achievable and desirable it becomes.”


What are foreign currency reserves?
Foreign currency reserves are used by all countries to stabilise a currencies exchange rate, protect against speculative attacks and service debt obligations. It is essential for all countries
to base their own currency on a build-up
of adequate reserves of commonly used international currencies.

How much does a country need in foreign currency reserves?
This is very much dependent on the policy 
and history of a country and there is a substantial spread of holdings across countries ranging within the European Union from 5.69 per cent 
of GDP in the UK, through 11.96 per cent 
in Sweden, to more than 40 per cent 

How would an independent Scotland get those reserves?
In total, $40.23bn could be feasibly raised to support an independent Scottish currency, broken down in the following ways:
$16.2bn from division of the UK’s foreign exchange reserves under a debt and asset negotiation.
£4.462bn worth of hard sterling currency is in circulation within Scotland. If half of this was converted into the new Scottish currency and the sterling held by a Scottish central bank, $2.9bn could be raised for the foreign reserve. An equivalence between the new Scottish currency and sterling over the transition period would ensure prices initially stayed the same.
$13bn could be raised via a foreign exchange swap with the Bank of England to aid the stability of the Scottish and rUK economies.
€8bn euros ($8.8bn) could be raised via the issue of a euro bond, some of which could be converted into other reserve currencies.

How much debt would be accrued on these foreign reserves?
The costs of servicing the debt, about £70.2m per year, would be substantially less than Scotland’s annual contribution to the UK’s foreign reserves (£500m) which are being built up by the UK Government to bail out the City of London in the event of another crash.