Welcome you to this meeting of the Scottish Affairs Committee. We've taken the unusual step of meeting in Edinburgh because obviously the Parliament's not sitting at the moment and we did want to hear the sort of evidence that you have to give us. We're working on the basis that we as a committee want to try and provide information to the people of Scotland about what the possible consequences are of different votes in the referendum, and so far, as you may be aware, we've issued a variety of documents, including our latest document which is headed No Doubt, No Currency Union. We've taken the view of which I think is understandable, given the very clear and unequivocal statements that have been given to us by leaders of the Labour Party, the Conservative Party and the Liberals, that the UK parties are not, for a variety of reasons, prepared to countenance a shared currency. And in those circumstances, we don't think it's worthwhile going over old ground again. What we want to explore with you is the consequences of each of the alternatives that are available to a shared currency, both in economic terms but also in terms of what the impact is likely to be, both industry and Scotland generally, and the finance sector in particular. I see that there's a particularly silly letter in the Financial Times today from a group saying that, well, you can reopen the issue of a shared currency. I mean, I think our view is that a clear statement has been made and policy has been determined, and those that wish to live in the real world and present things to the people of Scotland in terms of what the genuine options are want in a sense really to move on from that. So I wonder if I could just start off by asking if you could just identify us, for us, what you believe the main alternatives are to a shared currency. Now, I'm conscious with five of you, all of whom are capable of speaking for Scotland, the UK, and indeed the world, but at some length, we need to try and control this in some way. I'm told that the microphones, only two of them, as well as mine, will work at the one time, so you have to put your microphone on and then off again. Otherwise, I can cancel it if there's any difficulties. I wonder maybe just start at this end. David, in terms of the financial situation that you said, David, in terms of the alternatives that are available to the people of Scotland in the event of a vote for separation for a currency? Well, the three alternatives that are talked about are firstly joining the euro, which has largely been written off as a possibility, secondly, Scotland having its own currency, which is a matter of some debate, and thirdly, one that has been talked about quite a lot recently, and I'm sure will engage us this morning, and that's the so-called sterlingisation or dollarisation, both meaning the same thing, but essentially means adopting sterling as the currency that Scotland would use without any formal current, a monetary union with the rest of the UK, so we would no longer, for example, have the Bank of England as our lender of last resort and so on. So this is an issue that has been explored in some detail recently, particularly by a gentleman on my right, but I think probably the two options that we might focus on today would be this sterlingisation and Scotland adopting its own currency. That's a general view. I mean, we normally quite like if witnesses disagree with each other, because that allows us to have more of a debate and hear what the issues are, but I presume in terms of what the alternatives are, there's a consensus that that's the three choices. Pretty much. I would add to that another form of sterlingisation, which would be a currency board, which has also been articulated, which is in some ways a formalisation of the so-called panama option or the dollarisation option that David mentioned. So it might be worth touching on that, because that has been advocated by various people as a runner. Ben, is it, am I right in thinking that that's in a sense a subset of the sterlingisation argument? I see all three options as basically very similar, the monetary union option, sterlingisation and the currency board. They're all forms of fixed exchange rates, whereby you fix shall we say a virtual scots pound one for one against the remaining UK pound, if you like. So they're all very similar and at their core they have a fixed exchange rate, but there are subtle differences because for example with the currency board you would actually have a monetary authority which may have some control and some supervisory control for the banking system. Right. Well, maybe I could ask Lindsay if you could pick up the issues relating to sterlingisation first. Yes, good one, gentlemen. What does sterlingisation really mean and how does it work in practice? Perhaps I can start by trying to explain what it means and how it would come about. So the idea of sterlingisation is that sterling would be the legal tender or the legal currency for an independent Scotland, that's the idea. Now you could be forgiven for thinking that that's already the case, but there's a distinction here between the Scottish notes that currently circulate and Bank of England notes that circulate. Now the way things currently work is that Scottish notes circulate, they're issued by the three commercial banks, but they're all backed up and managed by the Bank of England. So the Bank of England manages this process. This is clarified in the 2009 Finance Act, Section 6. So it's managed by the Bank of England. Now if Scotland becomes independent then it would be quite unusual for the Bank of England to say where we're still going to manage what will become a different country's currency. There could be reasonably expected to say we're not taking on this role anymore because it's somebody else's currency. And at that point Scotland or the Scottish government have to decide what's it going to do in terms of its currency and that's where it gets confronted with a choice. Now one choice is that it creates either its own new Scottish notes and buys the Scottish notes existing and exchange them for new Scottish notes and then it becomes a currency board, that's one option. So you still have a distinctive Scottish currency, but then it becomes a Scottish government currency, not the Bank of England currency. Or you say we're actually going to buy back these Scottish notes and just accept English notes circulating and say we no longer have a Scottish currency. So you've got a choice. The currency board choice is that you still have Scottish notes but then you tie them to the English notes and they'll be the Scottish government doing the time, not the English government doing it, not the rest of the UK government doing the time. That's one option. The sterlingisation option is that you simply no longer have Scottish notes, you just have rest of UK currency. And now it's just as if you were effectively a region of the rest of the UK from a monetary point of view, just like the North East uses sterling, Scotland will be using sterling, but of course Scotland will be a different country at this point. Does pegging link into a currency board sterlingisation? Well, with the currency board, the Scottish notes will be pegged, tied, the value will be tied to the value of the Bank of England notes, presumably a one-to-one. With sterlingisation, there's no need to peg anything because all you've got is Bank of England notes. You just have Bank of England notes. That would be the sterlingisation option. Who would be on the currency board if what would be their status? I'm sorry? Who would be on the currency board if what would be their status? Well, the currency board, at this point, would be operated under the Scottish government and the Scottish government presumably would create a monetary authority because it's required to join Europe, so it would have a monetary authority and one of the parts of the monetary authority would be the currency board, which is usually a statutory part of the board, so it's a legal requirement that you create this and say this is how this thing operates, it has full backing, but the overall management of it will be at the highest level the new independent Scottish government and no longer what it currently is, which is the Bank of England does the managing of the issuance of the Scottish notes. So fundamental change on who manages this thing. In the event of a yes vote then, no foreign currency union, how would this transition be managed from a currency union to sterlingisation? So in the event of a yes vote, given that the parties of the Westminster Parliament have expressed the view that there will be no foreign monetary union, given that something will have to change to go from where we currently are to where we'd be tomorrow, my view of what they would change is that they would issue primary legislation to change the 2009 act, in effect to say the Bank of England no longer oversees the management and takes responsibility for the issuance of Scottish notes. When you think about that, if you don't want to have a monetary union, that would be the reasonable thing to do, because why would you manage the currency of another country? Clearly the rest of the UK's interest is going to be to say, assuming Scotland has become independent, it's to say we are no longer responsible for any liability of the Scottish government from here onwards. So one way to do that is to say, we're not managing the currency and that would require primary legislation in which the UK would be able to introduce to change the 2009 act. So it seems to be the lender of last resort? Well, we have to be very careful. That's a big question. So do we want to go to the lender of last resort now, because it's a big question. Essentially lender of last resort. Lender has come back later. Can you give us examples of where a dollarisation is called, this kind of practice, what the impact has been on the economy of these countries? Well, there tends to be two types of state where dollarisation is the vernacular for this type of currency arrangement. You can use euros, you can use Aussie dollars, you can use US dollars, you can use different currencies, tend to be called dollarisation. So one type of country is a city-state. Lichtenstein, Monaco, Luxembourg. So very, very small places. So the Vatican, those countries, which are legal countries, independent countries, they dollarise. And they get special dispensation usually because they're so small. It's so extreme, you've got bigger countries, which dollarise typically because they have tried to find a way of stabilising their country and their economic situation. So before they've got a decent size economies, by which we're talking millions of people rather than tens of thousands, Panama, which dollarised in 1904, longest-serving country, Ecuador and El Salvador, which dollarised at the end of the last century. So in 1999, 2000, 2001 sort of time. Liberia had a high degree of dollarisation, but then became de-dollarised. It was never quite formal, I don't think. So you have a number of countries which have had a high level of dollarisation and then backed off, but the main ones that have officially dollarised, Panama, Ecuador and then El Salvador, are the large ones. The Latin egg row is the next one down in terms of size. Why have they gone for dollarisation? What impact has it had on their economy? Well, the big ones, so just looking at the big ones first of all, I mean, for some of the small ones, it really is the pure convenience and the country next door to it that it dollarised too. It was the pure inconvenience of not having a role later, not to have monetary authority and so on. The bigger countries have dollarised in an attempt to try and stabilise their economy. If we take Ecuador, Ecuador had a huge debt restructuring in the 1990s. It then had another restructuring, a euphemism, by the way, for default. It had another restructuring in, I think, 2006 or 2007. So Ecuador did it because they had a lot of economic troubles, a lot of foreign debt and they used this as a way of defaulting on their debt without having huge currency issues at the same time because they don't have a currency, they're using the dollar. Panama has used the dollar, as I say, since 1904. It should be pointed out that between 1970 and 2000, Panama was second only, I think, to Pakistan in having the highest number of IMF packages in the world. So, again, not really a panacea. El Salvador's fed better. El Salvador, there was political difficulties and economic difficulties which led them to bring it in, but it's had better results for them. So those are the main examples. As I say, it tends to move you away from currency risk because you don't have a currency, but it doesn't disappear. It becomes credit risk. Can your country actually pay its debts? And what we tend to see is some of these countries have continued to have debt repayment problems. But then I think it's important to point out that these countries were already in difficult economic situations before they made these currency judgments. Okay, if they have debt-related problems, what happens to interest rates and borrowing rates? It depends on the economic situation of each country. I think one has to take the countries in their context, but overall, the effect is you no longer have currency risk because quite simply, you don't have your own currency, you're using the US dollar. But that risk gets transformed into another area and it becomes the credit risk. That you can't repay in dollars rather than you can't repay in your own currency. And, as I mentioned, some of those countries which have been dollarised have, before they dollarised, had a history of debt default and restructuring, but even after being dollarised, they still continue to do so, in particular Panama. Now, again, it's important to put into context these countries have a lot of other economic problems and so I wouldn't like to lead the suggestion that the act of becoming dollarised led to these defaults. They presumably would have had problems without being dollarised, that's why they got into this difficult situation. One final point I may, when I say that these countries have become officially dollarised, just to make this position slightly more complicated, is that they don't have their own coins quite often which trade, so it's not as though they don't have their own coins, so they do, but their official currency for writing checks, for making payments, for doing any sort of reasonable size transaction is the US dollar. Would it be fair to say then that those countries of dollarised have been in constant financial crisis or regular financial crisis? I think, let's say two things. First, those countries were in financial crisis before they dollarised and after they dollarised they have continued to have financial problems. After the dollarised countries, Ecuador and Panama have defaulted while they've been dollarised countries. There is empirical evidence that published economic and political evidence to suggest that dollarised countries have more financial instability than non-dollarised countries. That is fair to say. Can we move on to implications of sterlingisation on the banks here? Dr Kelly. Well, specifically for the banks, if we went down the sterlingisation route, then I suppose I defer to the much bigger and much better resource. Oh, thank you very much. Sorry. I defer, I think, to the big sort of guns in our industry who've been looking at these issues. I don't mean our own members. I mean Deutsche Bank, Fathom, Barclays Foreign Exchange, Exxam, BMP Paribas, Credit Agricole, BlackRock City, Comets Bank, UBS, UBS Chief Economist, Credit Suisse. Quite a long list, the very big names who have looked at these issues genuinely dispassionately. They're not companies that have any particular political interest in Scotland. This is analysis by some of the top names in the industry, and I've really just brought them all to one place to see what the consensus is. This is a collation of expert opinion. In my opinion, yes, and I think it's what the financial markets are looking at to the extent that they are pricing in the possibility of a yes vote. I think the clear consensus that comes through that is that if firstly going back to the original point made by the chairman that a currency union the views range from highly unlikely to simply unfeasible, so I think the starting point would be that a currency union isn't going to happen, that's the clear consensus. But on the other options, I think the consensus is that the most likely outcome would be sterlingisation in the short term with a new currency in the medium to long term, and I'm simply reflecting what's said by the industry rather than analysis we've done at our own hands, not that we'd be in a place to do that. In terms of the impact, the impact of both of those would be that there would be an expectation that the banks would have to consider their domicile to ensure that they had a new hinted at it earlier, the proper support through lender of last resort and indeed stability. So I think if we looked at the sterlingisation and indeed new currency impacts then there would according to this analysis be pressure for the banks to consider their domicile. Okay, that's quite a serious situation. What about interest rates and borrowing rates? Sorry, before we go on can I just clarify for the record what this question of domicile actually means for real people? What's the effect of reconsidering and secondly what's the effect of changing your domicile? Well it's difficult to generalise because all banks and all financial companies are different but there's a number of reasons why if Scotland becomes a separate jurisdiction for regulatory purposes and tax purposes regardless of the currency question that all these things are interrelated then companies would have to consider where would they best be located in order to serve the customer base on which their continued success is based. So in answer to your question what impact does it have? I mean it was interesting as an article yesterday in the FT by Sir George Matheson making the point that in his view it's his view rather than mine to a large extent the largest Scottish banks by which I suppose I mean Lloyds have sort of already moved anyway therefore it's kind of it's a process that's already that's already happened and he refers as well to the ownership or the part ownership of those institutions by the UK government but I think if you did see that kind of move you would see it having an impact not only in terms of jobs but also in terms of influence and the other supporting professional activities for example which having sizable banking operations in Scotland gives this. Can I just be clear what domicile means in that regard I mean there's blocks of flats in the Cayman islands which are almost collapsing under the weight of brass plates so they have domiciles of various companies now surely companies in Scotland could just simply move their brass plates and continue to work on in Scotland. There are different aspects to this and probably more expert people than I am on this panel but one aspect is if you wish to continue to serve the 90% of your customers who are in the rest of the UK you have to comply with the regulatory requirements and expectations of the rest of the UK so for example there are plenty of banks which are foreign operating in the UK to serve all those customers but they have to comply with the FCA as it's currently set up which means you have to have certain sizes of operations and you have to have some operations within the jurisdiction that is being regulated so there's a regulatory aspect to it. There's also a market aspect to it if you want to serve those 90% you have to be compliant fully with the financial services compensation scheme and other requirements like that. So there are some sort of things you have to do within the jurisdiction you're serving now that's the sort of domestic market question the sort of, I suspect as I say much more expert people than I on this but the lender of last resort question that is the question of where is your bank domicile for the purposes of state support of various kinds whether that's liquidity support in times of when there's a liquidity problem or whether it's bail out the sort of investments that have been made by the UK Government in RBS for example that I think does hinge very heavily on where you are now my own understanding and I've heard often heard it said that this isn't really a problem because when there's a crisis foreign governments quite happily sort of you know fund banks in trouble look what happened so the argument goes to RBS in America look what happened to companies to banks who were sort of funded by foreign governments my understanding isn't and others will be far more expert than I is that there's a big difference between liquidity support in times of acute crisis where the central bank is really giving short term lending to tide a bank over a kind of you know it's like a bridging loan that is one situation where I think the operations where the operations are happening is the defining factor but when it comes to bail out then I think that really depends on where you are registered and headquartered and I think that's a distinction Can I just continue this question of domicile because surely the scotch question industry for example would say that it's selling I mean this is more a point for union as well but I mean it's selling all over the world and therefore it's able to cope with all the rules and regulations about health and safety and you know whatever is necessary they're able to do it from a base in Scotland why should the finance industry be any different I mean even though they have to comply with the rules on selling in the rest of the UK why are they not able to do that from Edinburgh and therefore it would just simply be another one of the you know multi various markets that they're targeting Well as I say because it's I think the compliance requirements are jurisdiction based so if you it would be possible indeed to run a big international bank from a small country like or small market Scotland but if you wanted to serve other markets you have to comply with their requirements so a good example would be HSBC headquartered in London registered there but serving markets all over the world standard chartered would be even better example I think they have no business at all in the UK but all their businesses overseas however the capitalisation of their operations and what sits behind it is done on a country by country on a jurisdictional basis increasingly but as I say in times of acute crisis when we're talking about bailouts it's the home state which is headquartered I understand the point about bailouts in extreme circumstances and we'll maybe come back to that later on but in terms of what difference this actually makes trading in different locations you know surely it doesn't actually make all that much of a difference if you're able to comply with regulations in France or England or the United States from a base in Scotland then separation will not make any difference at all effectively in job terms but the difference for our members compared with the current situation is that you have to comply twice over at the moment you do it once for the market of 70 million if you have to do it for two separate jurisdictions you have to comply separately so as I say if you were serving the rest of the UK from a base in Scotland you would have to invest in things that met the requirements of the Bank of England so that would not only be levels of management and other activities you would have to make sure you had the right capital support and you could play your part in the financial services compensation scheme so there are clear compliance costs sort of fixed costs operating in a jurisdiction depending on the nature of your activity they can be large or small or particularly impact your bottom line or not but nonetheless there is a difference between complying separately for two markets and complying for one but this point about clear compliance costs might be clear to you but I'm afraid it's not clear to me I mean what is the scale of clear compliance costs I mean are we talking about 1% a 1.5% a 10% 20% I mean how many jobs would have to be transferred one man out of 10,000 or women out of 10,000 I mean to give us a if people outside who are not experts in the worlds of high finance and would tend to steer away from it if possible I'll try to grasp this issue what do they put their hand on to try and identify what the negative or positive impact would be I think what people tend to quite rightly focus on is jobs because that's when we talk about our industry we talk about 100,000 people working in it and that's the figure we tend to refer to it's not possible to say how many of those jobs are serving UK customers but I think it is reasonable to observe that the big battalions in that 100,000 are in banking pensions and insurance asset management for example vitally important part of our industry but the numbers of employees however influential it is in world markets and investment decisions and other things if you're just looking at job numbers it's a relatively small proportion probably probably fewer than 10,000 so a comparison that one could use to remake perhaps is with Ireland so Ireland an admirable jurisdiction who have a fantastic success particularly in attracting international financial services activity the Irish financial services industry in total employs about 60,000 people that's the total roughly half of those are working in international financial services this is the business of servicing financial transactions from all around the world so this is companies like HSBC and Citi and JP Morgan big names running big operations and we have a good share of that here in Scotland however it's 60,000 as against 100,000 now to some extent that difference is reflected by the fact that our industry is serving the larger market of 70 million so quite a lot of the jobs will be serving UK customers reflecting the fact as you know and this committee knows well 90% of the customers that are industries within the UK market are not in Scotland, they're in the rest of the UK so I would say and I'm trying to answer your question if you're looking at job numbers we would make a transition from being part of a large jurisdiction serving a large market to being a jurisdiction serving a much smaller customer base now you might argue and I think I saw a letter in the FT or yesterday or today arguing that actually if Scotland were a separate jurisdiction it could make it much more attractive for asset managers and fund managers to come and operate that's a hypothetical possibility of course but it is I think the opportunity that people are generally referring to when they talk about the opportunities that come for financial services from a move to independence it's the possibility that you could create a new environment for tax and regulatory reasons I could see that as a theoretical possibility there will be many different views on how likely it is to materialise but as a theoretical possibility it clearly exists however as I say if you're thinking about big battalions in job numbers they won't come through asset management and fund management the job numbers tend to come through the mass provision of services to large markets but unless I've missed the point I still haven't grasped whether or not that would mean that the 100,000 jobs in Scotland serving the finance industry at the moment would have to become like the Irish example 33 and therefore a lot of those jobs would move away or whether or not some other scenario give us a figure are you saying that with sterlingisation all bar 10 jobs would remain in Scotland or are you saying that after sterlingisation only 10 jobs would remain I can't give a figure because it's actually very difficult to break down the industry into those categories however I can quote Exxam BNP Paribas, Big French Investment Bank they estimate that the financial services industry is unlikely to survive in its present guise and they estimate that between 20,000 to 40,000 jobs would migrate to the rest of the UK I don't know what they base that on but that's the only estimate I've seen 20,000 to 40,000 job loss potentially that's according to Exxam BNP Paribas that's not a figure that we have come up with can we just pick up on the issue of sterlingisation and interest and mortgage rates is there like to be an impact sterlingisation from that point of view from a perspective of the industry I mean if there is a yes vote there is inevitably going to be a period of currency uncertainty even if without dragging us back to the previous conversation one believes, as some do that there would be a currency union that would take time to negotiate so there will be a period of time where we won't know what the currency future is and that will have to be managed and obviously there are plenty of examples of how people manage currency uncertainty if we moved to that that state I think there would be a number of issues one would be, as you've already raised and we may come back to Lendred Last Resort the other big issue which I think Professor Armstrong did touch on is if you operate a sterlingisation system I think there'd be some very tricky relationships and negotiations to be had with the EU I don't know others are much more expert than I am on this I don't know if it's really been tested whether using another country's currency on the basis of a sterlingisation model would be compatible with the EU treaties I think that's an open question I don't know the answer to it there is stuff in the treaties about having to comply with frameworks around central banks and so on could you comply without having a central bank in the normal sense I think at the minimum it would be a matter for negotiation and it could actually be quite problematic the other issue which hasn't really been aired is that if you have a sterlingisation situation it compares a little with the Montenegro situation where they are negotiating accession to the EU and the issues for them and I've looked into this and discussed it with some people I don't think there's an expectation that this issue will be resolved over the next quickly the process doesn't allow that but it is certainly a question whether they as the users of the euro on a dollarised basis can comply with the treaties now it sort of feels a bit unlikely that they would be prevented from joining the EU on the basis that they were already using the euro that's sort of on the wrong basis but the map that we've taken through that process is yet to be drawn up Could I just add to that on the Montenegro issue indeed to what sorry and what Angus was saying I mean all of the countries that Angus mentioned as examples are very small countries relative to the home country if you like so Panama its GDP relative to US's GDP is something like 0.002% Montenegro is even less so it's like a fly on the back of an elephant but the situation in the UK would be completely new territory because Scotland's GDP an independent Scotland's GDP is a proportion of remaining UK would be ballpark 10% now that's a very significant number and when people propose the sterlingisation option what they're doing is focusing on the supply of money the amount of money that's out there but as economists it will be remiss of us not to point out there's a demand for money and it's well known in what we call the currency substitution literature where you substitute another currency for your own currency that this creates very unstable expectations and it creates shifts in demand for money which makes the control of the money supply quite difficult and so I think this adds another layer of uncertainty to the whole sterlingisation issue which really hasn't been brought out I don't think the Bank of England frankly would be passive if Scotland decided to adopt sterling anyway I think because of the size of the Scottish economy vis-a-vis the rest of the UK I think there would be important issues of monetary control going on there so that really reinforces the point that I think William Kelly was making this is unlikely to fit in with EU regulations Can I just clarify when you say the Bank of England is unlikely to be passive what is being not passive mean? Well it's got its own at the moment it's inflation targeting or it was it's inflation targeting so if people are switching money balances around the UK if they're switching current accounts and they may start to switch sterling balances overseas which could affect sterling and this is the big issue in these kind of currency substitution situations that starts to make because Scotland is a relatively big economy that starts to make the control of the money supplied by the Bank of England an issue so their inflation targets become much more difficult to control if people are uncertain about the future of what's going to happen in Scotland if people are starting to move their funds to remaining UK but also across to the eurozone for example Right that's the nature of the problem that you indicated that the Bank of England would not remain passive and if they're not passive presumably they're doing something what would they do? Well it depends on the circumstances they may have to alter the quantity of money in the economy which could have spillover effects to what's happening in Scotland because we would have no control over obviously the control of the money supply they're going to as they always have done in the monetary union focus on the remaining UK control of inflation in the remaining UK inflation in Scotland is going to be moving in completely different directions to what's happening in the remaining UK so their reaction to an unstable situation in Scotland is going to exacerbate any attempts to control inflation in Scotland in fact possible in a sterlingisation set up Can I just clarify whether or not the action that the Bank of England would take in those circumstances to react to something happening on its borders would be any different to the sort of action that it would take to something happening say in the United States or in the eurozone I mean they would respond to economic circumstances around them and take various actions to protect their home base would there be anything distinctive and different about the action that they would take if it was Scotland using sterling as compared to just simply to reacting to events Yes I believe it would be because the sterlingisation option that we've mentioned is not a stable solution for the same reasons that a formal monetary union is not a stable solution so everybody knows that's not going to last now financial markets bring the future forward because it's in their interest so to do so there'd be huge uncertainty if we adopt sterling partly for the reasons I've mentioned just now but also because it's not a tenable exchange rate regime for an independent Scotland given the structure of a post independent Scotland so if I were sitting in Scotland with a bank account I would be uncertain as to whether we're going to adopt the euro so if I'm uncertain about that I may be moving on to my funds to the euro area now if you think of all actors in Scotland making these decisions and transferring bank accounts or proportions of their bank accounts to say the eurozone that is very different to what would be happening in the UK today in terms of the example you gave and it would have consequences for sterling which would have consequences for inflation which would then have consequences for what the Bank of England did Would it be a sensible and rational position for people who had bank accounts in Scotland which perhaps are not necessarily as large as yours to move their money somewhere else at the moment Well I believe it would any uncertainty over what your assets are going to be denominated in will lead rational actors whether they be individuals or companies to move their funds into other jurisdictions and I believe that is indeed happening sorry can I just be clear about that you're seeing that that's actually happening at the moment that individuals and corporate actors are actually moving balances out of Scotland and Scottish institutions into institutions elsewhere Yes I have spoken to CEOs of companies based in Scotland who have moved all of their capital out of Scotland in advance to the referendum and that's a rational thing for individuals today I believe it is because of the uncertainty uncertain expectations about what's going to happen in the future and what your assets and indeed your liabilities are going to be denominated in the future I'm tempted to ask you where you think we should move it to you're not a financial adviser and this is not necessarily the circumstances in which to do that Can I just clarify just on this particular point about people moving balances companies and individuals moving balances abroad I mean firstly is that experience or your understanding as well from the rest of the panel and secondly do you agree that that's a rational thing for people in these circumstances to do I mean people don't need to tell us as much as in their balances but just to give us an indication So have you got a back occasion England question This is moving money across borders is something called capital flight Now at the moment there is a border called the Scottish Borders between England and Scotland but there's no economic border from any intensive purposes If Scotland becomes independent then there becomes an economic border it doesn't mean you have to build a big wall but it becomes an economic border because companies that serve the whole of the United Kingdom have to decide where they want to put their registered office So this gets back to the issue of domicile So you have to have an incorporation or office of registration in companies house This is not a sort of warm term which is vague You have to name an office where you are incorporated or registered a company's house You can't be in two places at once Which country because you now have two independent sovereign states Which one of those two are you going to put your offices So it becomes important and those flows that go between those two countries currently which are called within UK flows become cross border flows So they become international transactions So when Luxembourg wanted to join the Euro area that created its own new balance of payments figures as Scotland will have to have its own balance of payments figures and its exports of financial services to the rest of the UK become exports of goods and services to what become a foreign country So it does matter where you A have your business where you locate your businesses but also the place of your registered or incorporated office matters because that is where you are going to be regulated by So it is profoundly important and it has to be made clear that it is not an issue of brass plates This is an issue of you have to have an incorporated office or registered office in one jurisdiction or the other for one legal body So that matters for who is going to regulate you Now, once you have decided that you have your incorporated office you can of course create a branch or subsidiary in lots of other countries Of course you can Branches and subsidiaries have very different meanings If you are a subsidiary then you are regulated by the country that subsidiary is based in The deposit insurance is provided by the country that you are based in and it is legally protected in that country that subsidiary you are based in and those things are not the same You are not regulated You are regulated by the home country Your deposit insurance is not provided by the home country and so on So they are very different models It is very important to be clear on what people are talking about Now, this gets to the question of what should you do with your money Well, it depends whether it is going to be a branch or subsidiary in a foreign country So these are the technicalities that actually start some matter One thing I think that one can say is that the period between the vote and when Scotland would become an independent country then in that period then until there are legislative changes then everything continues to be the UK An independent Scotland would not have been created at that point so there is no need to do anything because it will be under UK regulation you would have UK deposit insurance UK regulation and so on and so forth After Scotland became legally independent and the acts had been changed because you have to have the acts to change these things then you have different legal constituents and that is when people have to decide Do they think that the deposit insurance in an independent Scotland is the same as a deposit insurance in the rest of the UK? That is what people have to decide Professor Bell, I wonder if I can turn to you about externalisation public finances and borrowing what would be the impact there? I think this in a sense comes indirectly by this issue of lender of last resort and how Scotland would be perceived by the financial markets and essentially if you don't have a lender of last resort in some or other a fund has to be built up in order to deal with liquidity crises of financial institutions that are still based in your jurisdiction so you don't have the bank of England you have to have something different and what it could be one possibility and one that's used elsewhere or indirectly used elsewhere is the strength of the government's balance sheet and that a strong government balance sheet means running a budget surplus which means that tax revenues exceed spending which means that we would be in a situation different from that which we are in now where spending for a Scottish Government and indeed the UK is not in a markedly better position but Scotland would be a relatively small country, that's one important difference but nevertheless so spending in Scotland exceeds revenues by around let's say 8% at the moment so you'd have to go from that situation to one where you start to think about building up a fund which ultimately is a fund that is there to protect your own financial institutions because you haven't got a lender of last resort and actually in the current fiscal situation it would take some time to build up such a fund because you've got to get to the starting block before you can start to build up the fund how would that be done how would that be done what would be the implications for services and taxation well, I mean so it would require a pretty strong fiscal constraints which is one way of describing you know, cutting spending and finding every possible way you can to increase tax revenue so an austerity programme well it could be of course one could go too far but austerity programmes and end up cutting off demand so much that the fallen spending actually causes your revenues to drop as well so it would but it would not mean a period where you could do anything other than be very very careful with the public finances right and John Sony says he's willing to borrow 2.4 billion to tackle poverty and the agenda we have at the moment of an adverse situation of austerity programme and so on what's that like to mean well you know if it led to a you know a greater increase in tax revenues than the increase in spending it would be okay and then that becomes a question would that happen I guess my presumption is that it probably wouldn't and that puts further into the future the possibility of building up this fund that you might need to protect your financial institutions okay several commentators have said that sterlingisation would be a disaster for Scotland is that your view of what are the key components the key uncertainties that would make it very difficult to project how Scotland would perform can I just say one thing Ronnie mentioned earlier effectively what we would have is sterlingisation is a fixed exchange rate between Scotland and the rest of the UK now the question is post independence would that be appropriate to have a fixed exchange rate and if it's not Scotland might be losing out in competitiveness which would mean that it's long term growth prospects might be affected now there's an issue about whether oil itself because it's relatively important to the Scottish economy much more important to the Scottish economy than to the UK as a whole suggests that there ought to be a different exchange rate between Scotland and the rest of the UK it a fixed exchange rate works so long as you've got broadly the same level of productivity and you're trading a lot together it's not entirely clear especially if Scotland takes off in relation to its productivity growth which is one of the scenarios that the Scottish government has put forward that a fixed exchange rate would still be appropriate so I guess that would be my key concern whether over the medium to long term unless the Scottish economy pretty much matters what's going on in the rest of the UK would a fixed exchange rate i.e sterlinglisation continue to be an appropriate policy I think my concern would be that it wouldn't just be a medium to longer term issue be a short term issue because of the oil effect that David mentioned I mean this for me is the big E with respect to designing any sensible exchange rate regime for an independent Scotland because it becomes a petro currency as soon as you become independent that happens not in the medium term the long term is the one now there are a number of channels through which that will affect the exchange rate the most important one is the terms of trade that's your exports as a proportion of your imports that's a relative price prices move quickly prices move on the day of independence so that effect kicks in immediately and therefore the regime any form of fixed regime that you care to pick whether it be a formal monetary union or as David said the sterlinglisation options I mentioned all of these immediately become inappropriate because you're a petro currency add on to that other issues of productivity divergences which I believe would happen endogenously but also the Scottish Government has explicitly said it wants that to diverge that's another well known driver of a country's competitiveness or relative inflation so all of these factors taken together mean that today one of independence any of these sterlinglisation options is not a realistic or credible option and is bound to fail especially so since the number of people engaged in college education vocational schools is very low in fact in my own authority in five years it's reduced from 40,000 to 16,000 so we have a low school economy relative in relative terms to some other areas of the UK well that may be but this issue is more about price effects and competitiveness effects rather than our skill set but I believe in the longer term that would have an additional effect as well and I think the other point to make on currencies which I mentioned earlier is that financial markets bring the medium and long term forward to today it's in their interest so to do to make a capital gain or capital loss by taking a particular position with a currency they're not going to wait till the medium term they're going to bring about that crisis today I think that is a very important point to be recognised in this whole debate that unless you get the exchange rate regime right on day one there would be I believe economic chaos in Scotland post independence when you say crisis what kind of crisis? well if you were adopting sterling you would have a I mean I think sterling would start to go through the floor basically yeah because of the uncertainty that would be creating there would be capital flight as we've mentioned away from Scotland I don't think you would need to wait until you sorted out the jurisdiction issue I think it would be in people's interest to move funds more or less immediately because they could see or will see that that regime is not credible and people can also issue financial instruments to take positions on an independent Scotland which could be very, very significant Ian, any comment to make on that? I think the first thing to say is that the CBI has not done any detailed really detailed research on these four options I mean we know what their characteristic are our members tell us that they have concerns about the four options they do introduce a great deal of uncertainty into the business community I mean that shouldn't surprise any of us from what we've heard from my colleagues here this morning but our view goes back to the best thing for Scotland would be a formal currency union but that can only take place if the United Kingdom remains intact the Scottish Government their proposition is that that will remain but the UK Government and the opposition parties have ruled that out so it's a very, very uncertain situation for business and then when one compounds that Owen Kelly spoke about regulation and issues around that it goes further than that of course because at the moment in the United Kingdom we have broadly a common set of laws and rules that businesses operate under, whether it's company law very extensive and detailed corporate governance rules nowadays taxation, employment law health and safety law and so on when a country becomes independent if Scotland were to do that then over time it's likely as politicians react in legislatures to events that happen that these common laws and rules would start to diverge and cause more cost for business across the two different jurisdictions OK that's very helpful, thank you Mike, you wanted to raise a point We've dealt quite extensively with this organisation but I just wanted to go right back really to something that Dr Armstrong said that he would not be able to put in place a a full-on a full-on a full-on a full-on a full-on a full-on a full-on a full-on I think that Dr Armstrong said because you listed the countries that have used dollarisation and you painted quite a bleak picture of the likelihood of it working and indeed to Professor MacDonald you backed that up saying sterlingisation is a long-term solution for anconomy of our type but the country that we haven't talked about and perhaps it's because you were dealing with sterlingisation rather than a currency board is Hong Kong and that's always the one that is held up bwysig o'r Yng nghymru, ac mae hyn yn gallu'n gwybod i'w gweld i ddweud fod ein gweinidol cwrwm. Mae'r gwybod yw'r cwrwm hyn, mae ydyn nhw, o wneud i gael ei chweithio, ond mae ddweud i gael efallai o modu wyrd ym Mhgrwedd yw'r Gwyllgor. Felly oed diwetodd o ymdill o'r partus iawn, ac efallai hefyd yn gweithio. Yes, mae saneso chi gael. The difference is something which, in our research, we have tried to bring out, for us, is a most important issue which is called debt. Hong Kong, since the government's Board was started, had almost unbroken string of fiscal services, a remarkable record by anybody's measure. ddiddordeb bod yn cael rhan o'r ddod, o'r ddod, o'r ddodion o'r drosio'r GPD. Mae'n ddod o'r ddod o'r ddod o'r ddod o'r ddod o'r ddod o'r drosio'r ddod o'r ddod, ac o'r ddod o'r ddod o'r ddod. Then, it has its foreign exchange reserves. Hong Kong's foreign exchange reserves are over $300 billion. I think that independent Scotland is a population share of the UK reserve. A UK reserve are about $70 billion. Hong Kong's are $300 billion. I presume you get 10% of $70 billion. It seems a reasonable approach. so they are completely different. So the big difference for Hong Kong and why Hong Kong can do these things, you're completely correct. It has lend of last resort and yet it basically takes itself to somebody else's currency. It can use stabilisation measures. It has China making huge differences to its flows in anartica's border. Why can it do all of these things? It can do these things because it has enormous reserves which have come through 30 years of fiscal prudence and saving. And absolutely, if a country is in that position, you can do these things. If you do not start from that position, you start from the position of taking a reasonable fair share of the existing UK debt, then you're more likely to start off with an 80% debt-to-GDP ratio rather than having all of these reserves. That's why they are so completely different because the debt position you start from is absolutely different. And I may say the reason why, compared to Ronnie and David, I haven't come into a slightly different position but I think we've probably all recognised this point. For Ronnie, the volatility of oil is a key factor in his prognosis. I completely accept that. If you had huge amounts of fiscal savings and reserves, you could perhaps manage some of that if you had huge amounts of fiscal savings and reserves. For David, to build up the reserves you need to do lend of last resort, then you'd have to have lots of services. But if you had the savings and reserves already, you could do that as well. But unless there's something I don't know, there are not all of these reserves hanging around. The UK overall is not in a good, not in a strong fiscal position. Its debt-to-GDP ratio is almost expected to be about 90% of GDP in 2016. That's what has to be divided up. It's not a country with huge services like Hong Kong is where they can do this. It's a country where the debt-to-GDP ratio is going to be about 90%. That is the key issue which makes all of this very difficult because it's a limit to what you can afford to do. Okay, but let me come back being devil's advocate for a moment because the Scottish Government's position has been that the quid pro quo of not achieving a monetary union would be not taking the share of the debt. So if your argument is that it would immediately have a large amount of debt and that would stop sterlingisation happening, well what's to stop it working if it doesn't have the large share of debt, presumably, it's because it wouldn't then immediately be able to start to build up a surplus because it would still be in day-to-day deficit in its spending. So is that the argument why it can't happen even if it doesn't take the share of debt and has the poor debt ratio at start-up? So, if the UK, the Bank of England is an institution of the United Kingdom Government, which includes, of course, Scotland or Ireland in England and Wales, with Scotland becoming an independent country, it will continue to be an institution of that United Kingdom state. It is therefore backed by the taxpayers of that state. Those taxpayers wouldn't be Scottish taxpayers, so Bank of England blew up. It's not Scotland's problem. It's the rest of the UK's problem. Vice versa, if Scotland blew up, it's not the Bank of England and it's Scotland's problem. That's what independence means. It means taking responsibility for what goes on in your country. Now, the idea that, well, we can't have another strategy because of this amount of debt, so therefore we won't pay the debt, which is, I think, what you were alluding to, or somehow we won't take our share of the debt or... But that's the Scottish Government's position, isn't it? Well, I don't know if there is a clear position, actually. But if the proposal you're suggesting, I think most people would say an independent Scotland would be expected to take a fair share of the existing UK public sector debt. That is what the Scottish Government has said they would do. Now, you get at the question of what is a fair share. Reasonable question. Well, I accept what you're saying, but you're going off and off a little bit of a tangent here, because if what I'm trying to do is set up a position where, you know, you're saying that sterlingisation cannot work because of the debt ratio, and it's not like Hong Kong because they don't have debt and we would have lots of debt. Well, if the position of the Scottish Government, and I accept that it's not a stated, if we don't get this, we're not going to take that. But there have been enough hints towards that there's a bargaining tool to be used here, that if we don't get Manitunia, then we won't necessarily take the debt. Now, if that came to pass, does that answer your question that... Or rather, my question that I posed about what you're saying, that that would make sterlingisation work, because it would put us closer to a Hong Kong position where we didn't have debt, or are we still left in a position where, because our spending is greater than our incomes, I got you, yeah, would it still leave us unable to be in that position? Okay, so if an independent Scotland had no debt for whatever reason you're going to suggest happens in a negotiation, but if it had no debt, clearly, from one point of view, other options would become more viable, except for two things. One, you'd still, as you quite rightly pointed out, still be running a...  It's not just about getting to balance, Hong Kong's had surplices almost in interrupt for 30 years. That's the first aspect. The second aspect is, in that process, you are presumably going to be issuing some debt in order to generate a savings pool to be able to provide things like Lend of Last Resort and so on, and if you're running deficits. You're going to have to borrow from somebody where you've pretty publicly not taken what people consider to be a fair share of debt. So then you have the consequences, one, for the existing deficits, and two, for when you do start to raise debt, what is the price, what is the interest rate you're going to have to pay on that debt, given that you would not, under your scenario, have accepted a fair share of the existing UK debt, and all of the things that people like credit rating agencies will interpret that to be... So, to sum up, we're very different from Hong Kong because we either accept the share of the debt, therefore cannot act as Lend of Last Resort in the way that they do, or even if we don't have the share of debt, we can't build up the surplus to enable us to act as Hong Kong does. It would be more difficult for you to build up the services. I can't hear. If Scotland, an independent Scotland, ran large fiscal surplices of a sustained period of time, options would certainly come available to it. But what it would have to do to be able to run those fiscal surplices would be pretty horrendous? Well, in short, you have to raise more money than you spent, and there's a number of choices you can make on that. That's obviously politicians to do. You'd have to do that for a sustained number of years to generate these surplices in order to do this. That gets made more difficult if you don't take on any debt at the beginning because the interest rate that you would pay to service whatever debt obligations you'd have would be greater. But certainly running fiscal surplices for a number of years, substantial fiscal surplices for a number of years, Scotland would have a surplus, it would have fiscal reserves, it would be judged by Scottish citizens and foreign citizens as a country which can have a credible macroeconomic adjustment. That is quite a tall ask, but Scotland will make its own decisions, so one that it can deliver. For a number of years, what are we talking about? Well, so if you were to have a domestic banking system, by which I mean legally based and regulated in Scotland, where Scotland will provide deposit insurance, so how many deposits are there in Scotland and what proportion of that would you perhaps have to think about building up this sort of reserve? These are the sort of numbers, we're talking substantial numbers if you were to have the sort of reserves to provide your own lend-of-loss resort operation using fiscal accounts. I think Professor Bell is anxious to give me a number. Taking Angus's number of a 30% ratio of fiscal fund relative to GDP that you might support, lender of last resort and other activities with, we're currently around an 8% deficit. Over four years if the current government programme is successful in reducing the deficit, we'll get to about just about a fiscal balance. So then you've got to think about how many years and what kind of annual surplus you would need to do. Obviously if you think six years, well that means a 5% surplus each year. So a 5% excess of taxation revenue over spending. OK. Could I just add a looking point that follows up with Angus said? Angus said that if you build up these surfaces it would be possible to deal with the oil volatility effect. That may be true, I think in part, but of course the oil volatility effect comes in as I said earlier in Day 1 of independence. So even if you could do that, it's going to take a long time to build up the kind of reserves that for example Norway has built up to do exactly that. So even if you were to engage in an austerity programme the regime is still a dead duck as far as I can see. Well that's right. The operation in the long term might be a success but in the short term the patients died. Exactly. There seems to be an element. Can I just clarify a couple of points if I could? It's been mentioned on several occasions by the Scottish Government that they would refuse to accept any share of the debt if they didn't get their way in a shared currency. And I think that's quite clearly been trailed as a policy option. What I'm not clear about is what the consequences in interest rate terms would be for real people. I mean I understand Mr Armstrong's point about there would be an increase in the interest rates. I know that we seem to have a variety of Halloweya's outside unless you're in relation to this particular point I'm making. I mean I understand that there would be an increase in the interest rates for government borrowing for a separate Scotland. I am not clear what that would mean for real people in terms of mortgages and so on. Would there be a complete disconnect so that mortgages would carry on as they are at the moment irrespective of the rate at which the Scottish Government borrows? Or would the mortgage of people in my constituency be directly related to the increase in the borrowing rate that's been applied to Scottish Government debt? Maybe yourself first and then I'll pick up the others. Sure. So mortgage rates depend on the official interest rate plus the risk to the bank of it raising its own funds. So the riskiness of banks matter to people's mortgage rates which is why in the crisis a lot of the mortgage products disappeared and some of the mortgage rates that people paid in the early days of the crisis actually went up even though official rates were very low. So the risk that banks pay matters. Now what determines the risk of banks? Well if they are Scottish banks by which I mean either incorporated in Scotland or subsidiaries in Scotland so they are legally Scottish institutions then they will be independently capitalised and their credit standing will depend in part on the soundness of the business but also in part on the soundness of the institution which stands behind them. And the institution that will be standing behind these subsidiaries and Scottish incorporated banks is called the Scottish Government. In fact this has been made very clear by rating agencies. Rating agencies judge banks on two bases now. One is the soundness of the bank and two is the soundness of the government which actually would be its backstop. So they explicitly say we take this into consideration. If these mortgage products are provided by Scottish subsidiaries Scottish incorporated banks then that suggests that the ratings of these institutions would not be as good as they would be as part of the United Kingdom which suggests that the cost of funding would be higher which would have a knock on effect for the cost of borrowing. So if they are Scottish incorporated and subsidiaries in Scotland then the sort of scenario you are painting would lead to a higher cost of capital for these institutions for these banks and therefore higher borrowing costs. If however the mortgages were provided by branches of rest of UK banks so these are banks located in the rest of the United Kingdom selling mortgages in independent Scotland then it would depend on the funding cost of the UK bank and the UK bank funding cost presumably would be relatively unchanged. On that basis the mortgage rates might not go up for those sort of mortgage products and so you can quite easily see there's a competition issue here of which one would win. So this is why it matters where the location of business is. Presumably in those circumstances nobody in their right mind then would willingly have their mortgage with either a Scottish institution or a Scottish subsidiary. They would all want to make sure that their mortgages were with branches of UK institutions.  So the way that Scottish institutions would respond presumably would be by becoming much safer and sounder than the rest of the UK ones. So when a rating agency looked at it they would say well okay the government behind you may have not taken its fair share of the debt but you are so safe and sound this is never going to be an issue. So one of the odd things you tend to see is that in countries which have dollarised their banks actually tend to hold very high levels of reserves because they now find well there's no government there. Yes but I mean I understand the point about Scotland possibly becoming the El Salvador of Europe being destabilising but if the banks wanted to hold bigger capital surplices this is not something that can be done overnight. So you know on day one of a separate Scotland these capital balances will not have been built up and therefore the impact presumably on mortgage rates for my constituents who are holding mortgages from Scottish institutions or subsidiaries in Scotland will rocket upwards whereas hopefully those who have their mortgages with branches of UK institutions will remain the same. Well your constituents depending on who they bank with so Scottish banking is dominated by Lloyds Bank Group or HBOS and RBS quite clearly it depends where they would be located post independence. This gets us back to the discussion at the beginning you see now it does matter where you're located. Right can I just clarify then what I mean that was the second area I understand that but as well as then Professor MacDonald's recommendation that people move their money they should also be considered moving their mortgage but since you know transferring your mortgage from one institution to another takes by enlarge to take a certain amount of time and in these difficult times it's becoming tighter and tighter but it's the sensible thing for people to do now would be to check who's holding their mortgage and to consider getting it transferred right away. Yeah but I think the point I would make there is that there's obviously going to be a distinction between assets and liabilities and what I'm thinking of there is that if you do move to a separate currency I would imagine that currency is going to depreciate relative to Stirling remaining UK's currency and therefore if it's liabilities you've got denominated in the rest of the UK which would be your mortgage if you have to pay off the principle for example which is still denominated in Stirling then that could of course be equally bad news for someone who had switched their mortgage from it yeah so you've got to yeah I've actually gotten my list of questions for for separate currency the question of mortgages as well so I mean to some extent people you know if you if you work on the basis that the Scottish government is saying that they will continue to use Stirling and if we assume at the moment I mean which I think is is the absolutely correct assumption to make that there will be no currency union we are then forgotten to have this Stirling isation and in these circumstances not only is it sensible for people to move their deposits they should also move their the liabilities as well in the form of of mortgages since that by that they've got a higher chance of keeping a reasonable mortgage rate now is that is that correct I can see some noddings but unfortunately Hansard doesn't he record noddings so I think we would have to have some sort of statement from yourselves I mean Mr Hansard and then Mr Kelly maybe so well I'll just keep my comment short the domicile and the structure of the bank that is provided your either your your deposit savings account or your mortgages will now matter and these are the this is why location of banks will start to matter because it'll depend on the regulator and it'll depend on the sovereign that stands behind those institutions I only want to just oh sorry I only want really to add one observation as I say drawing on the analysis that's been done by our industry there is a clear consensus that if there is a yes vote there will be a relatively modest impact on Stirling although I appreciate there are there are other views that it might be larger but in terms of the ratings there is a clear consensus that as an independent country Scotland would have a lower rating than the rest of the UK if you have a lower rating as a sovereign I think this linkage that applies even in a Stirling isation situation that affects the ratings of the companies that are domicile within that sovereign so you can't sort of have for example I think it's very unusual I think it can theoretically happen to have a sort of triple A rated company within a jurisdiction which is which is relatively you know rated rated lower than that so the relationship between the overall sovereign rating and the ratings that are available to companies within the jurisdiction could also be a factor I think taking all of that into account there is also the question of the the durability of the Stirling ised area what happens if it does not endure and it may be it may well be that such a state of affairs would not endure in the medium to long term that would be even worse because there are businesses there you know I mean this is horribly complex as it is and our members tell us that how uncertain and complex all of this is but if that state of affairs was to break down then we could see a situation where companies assets are here their liabilities are over there you know their earnings could be in pound Stirling but their costs go into what replaces a Stirling ised pound in Scotland and so on and so forth and that would be a matter of very considerable seriousness for business can I just clarify I mean am I right in thinking that there is a discrepancy between what Professor McDonald was saying and yourself because when you seem to be saying that this would not be stable over the medium to long term I thought that Professor McDonald was saying that there was a real danger that the markets would speculate against Stirling isation in such a way as to bring about change really quite rapidly and that it would descend into into chaos and force some other changes within a much shorter timescale than than Mr McMillan seemed to be suggesting well that's what I believe coming at this from from a you know from a currency aspect that's what all the evidence seems to suggest that you know if financial markets are either going to make a capital gain or a capital loss they're not going to wait till the medium term to incur that loss or gain they're going to bring the medium term back to the present because they want that gain now and that's the whole the whole point of the the so-called speculative attack literature where currencies are attacked because they're not they're not able to address underlying competitiveness and I think we saw a classic example of that I think it was last week where Argentina which defaulted 13 years ago in its debt because it was defending an inappropriate exchange rate its competitiveness was changing and it defaulted its debt and it's still not been back in corporate bond markets indeed it's had to it's had to default again as we've seen and it led to an economic collapse in the country with 100% inflation shortly after that before. Can you just clarify what a speculative attack means I mean our visions of Swiss gnomes you know the flag the swag I mean I'm not quite sure how it actually operates yeah well it can operate in a number of ways but it's basically a recognition by the market that a country's currency is a country's exchange rate it's chosen exchange rate which here would be I think we've accepted we one to one is not appropriate now in in some cases it may take some time for all these gnomes to to to network but often what happens is there's a big gnome and in in the UK's experience that was George Soros he effectively coordinated speculators he said I don't believe Sterling's rate within the ERM is is tenable and he said I'm going to hit to the Bank of England and that's what he did but by doing that and by saying that by by making that commitment he coordinated all the gnomes if you like and so there was huge pressure which I understand that I understand the concept of selling sterling shot okay I understand that what I'm not clear about is how that operates in circumstances where both countries have got sterling as it were where you know the UK has got sterling and Scotland is sterling out so I mean what is it you sell shot so when you both have the same currency the as an independent country you always have the option to introduce another currency so if so the the issue we're talking about here is capital flight if people and I'm not saying whether they would or not but if people thought that this arrangement was not credible then they would move their money out of one country into a different jurisdiction and that capital flight would lead to a lower a lower level of economic activity until such a point and a worsening fiscal accounts until at such a point people democratically decide this is not worth it anymore which is essentially what happened in Argentina in the currency board collapse so they had legal currency board that collapsed in 2001 2001 where a number of controls and restrictions have been put in place it basically led to riots in the street and so on now what's interesting here is that we know from the white paper that there is an opportunity to current to change currency arrangements at some point in the future and if enough pain has been imposed will people take that opportunity because if they do then you'd be introducing a different regime in difficult circumstances and that's where you can get potential gains or losses so that's how you do an attack then the other way you would do an attack with one currency is the same way as they did it in the eurozone you don't have to have a currency to form an attack you can do it through interest rates these countries all of a sudden the governments they couldn't issue bonds or raise finance at a reasonable price and so the attack become mutates into an interest rate issue when because of economic activity is low so you have to issue bonds to pay for your fiscal deficits but when you go to issue bonds people say we don't think you can pay us back so we're going to charge you a higher interest rate that higher interest rate becomes well then my fiscal deficit is going to be worse which means I'm going to have to issue more bonds which means I'm definitely going to charge you a higher interest rate and around it goes and that's another way the fiscal attack can happen so just having saying one currency therefore we can't have an attack that's not the case it is the flows of private citizens but businesses and households which will decide the durability of the exchange rate not what any government decides to put in place in the attack before a government they attack in that way the actions of of private citizens and corporations are not necessarily designed to attack the currency they're just people taking prudent decisions to move their money to safer jurisdictions but the effect is the same as in an attack that's correct so people will people the nature of human beings we've seen throughout centuries as they look to preserve their capital fine David just just known as they're not necessarily maligned they're just acting in their own interests and the other case where you had a single currency where this happened recently of course was the Czech and Slovak republic example where effectively it was capital flight that caused the eventual breakup of the currency there I just thought it'd be useful to quote from the UBS global research on this and they say events in every monetary union breakup of the 20th century have shown that bank depositors preempt any political negotiations and withdraw money leading to the incentive to reduce credit creation and to raise interest rates for domicile businesses so I think their view is that all of this is driven as others are rightly saying I think by customer sentiment and people's actions rather than you know I suppose theories about currency unions or other things well I think we've covered sterling isation fairly thoroughly um but possibly we'll come back to it if other questions occur to us maybe I could turn now to Graham to pick up issues relating to to the euro yeah yes thanks very much uh shares visions of gnomes going about the along with the angels singing outside um okay so we've we've kind of established that in terms of there being a formal currency union post independence that that's not a realistic option neither is sterling isation or else Scotland and an independent uh scenario would be a probably be an economic basket case and of course in terms of a plan B there's nothing in the white paper to suggest that the government the Scottish government have given that any series to consideration although we know that there are some people in the scamp who actually do take the view there should be a separate distinct currency post independence in terms of the euro now we obviously are aware that you know the ambition of an independent scotland would be to join the european union it certainly would have to give a commitment at least in the long term to to join the euro and we're aware that there are implications if scotland was to go down that path i think initially professor bell suggested that it's an idea that's probably already been written off but i just wanted to explore whether you thought that scotland an independent scotland being in the the euro zone would be a good thing for scotland aim would you like to kick off thank you very much well i think the first thing is that um west scotland to make a bid to join the euro then presumably it would have to be a member of the european union first and you know again you know our members have seen considerable difficulties arising because the uk government and with some academic support and indeed the the public statements of the president of the european council and the president of the european commission has said that an independent scotland would be a new state outside the treaties and the rest of the uk would be the continuing state with the treaties still applying and therefore an independent scotland would need to apply and go through the negotiation process and you know if eventually it was admitted to the european union by all 28 member states the conditions of membership could be different now of course that's controversial because the scotland government say that that would not happen and they have some academic support to suggest that that scotland's passage into the EU or continuing in the EU would be more more straightforward albeit with with some conditions which may differ from from from from those that exist at the moment so that's the first complexity in all of this is that you know it could take time for scotland to to take or or in some way maintain its place in the EU with the euro coming you know some some time after that so what happens in the intervening period you know after secession what currency would be used what arrangements it would be would would be put in place there and for for our members that's that's that's a matter of concern but even even with the euro we've seen what happens in a currency zone where political union and fiscal union are absent and indeed dr armstrong described the the attack on some of the the countries through fiscal levers and so on but there's also the the question of of long-term trading arrangements because scotland's entry to the euro would mean that it would be using a different currency from that in the rest of the uk the rest of the uk it's our closest neighbour it's our largest trading partner with nearly 70% of our exports going to the rest of the uk and therefore entry into the euro zone would introduce two things first exchange rate differences and therefore costs around that and it would also introduce cost of exchange so that when companies by sterling by trading their euros there's a cost to pay for that there's also a spread and and so on so again this not only are there uncertainties around all of this but there are there's actually scope for an increase in costs of doing business across that international border as it would become and compounded by a different currency okay now that that's that's interesting i mean in terms of your members i mean it's just the kind of thing that that your members are saying to you that if we ended up in that kind of scenario that there would be a real serious concern because of the barriers in terms of trading um obviously you know with regards to south of the border an increased cost when it comes to the whole issue of exchange rates that's correct um that that that's the concern and also all the the short to medium term uncertainty um that surrounds that um as as we go forward in the in the event of a yes okay thanks if we maybe could look at the the implications of of scotland post independence you know being part of the euro and the implications in terms of scotland's fiscal policy could maybe describe what kind of scenario would we see in a situation like that and would that be you know advantageous to an independent scotland or disadvantages and we don't want to pick up on that so um we know that uh in the past there were uh the stability and growth pact which um spectacularly i think it's fair to say failed because of the bigger countries and they have been replaced by what's being called the fiscal compact which um because there's not actually political union between all these countries they're kind of doing it slightly in the backdoor way by saying in this fiscal compact you have to legislate to have balanced budgets now there is some wiggle room for when you have difficult periods so it's not all periods but so there if if an independent scotland were to join the euro then it would also be signing into these fiscal constraints which you know you may be perfectly sensible but there would be fiscal constraints there would be signing into it and presumably there'd be an impact on the cost of borrowing as well probably in the wrong direction well if they joined the euro then they would be using the euro now the interest rates as we know are not identical in each country in the euro zone it would be very nice if there were but they're not and the interest rates would depend on the position that scotland would take it would depend on the debt that it would inherit depend on its productivity its economic policies all a number of things so it would depend on what scotland would look like within the euro i have to say that i am less skeptical than some on an independent scotland using the euro there will be a number of advantages to it as well you know scotland has a big financial sector as we've talked about it will be able to spread some of those risks within within the euro community so there are advantages as well it would have a say on the ECB council it would have a say of a monetary policy okay it would be one of 20 voices but it'd be a voice so it's not i think that um it's too easy to dismiss it because of its last 10 years of troubles or eight years of troubles i think it's too easy to dismiss it out of hand without actually considering what the pros and cons are here transitional arrangements absolutely currency volatility vis-a-vis your biggest country completely agree i guess i think that some of those issues about currency volatility vis-a-vis your biggest country you know it didn't make it didn't cause a disaster for those european countries that have not joined the euro it didn't cause their exports to collapse i just not quite as worried as some i just add something there yep yeah yeah it goes back i'm afraid to the oil effect the petrol the petrol effect that that's still there whether you join the euro or not and of course the reason that norway hasn't joined the euro is because of the oil effect and it would have a scotland independent scotland would have a similar amount of oil if you got a geographic share to the Norwegian case both in terms of its trade and as a proportion of GDP all of the existing EU members are non-oil producers so you would have this important asymmetric competitiveness effect how do you deal with that you may have to not just have a budget balance but you may have to the a budgetary surplus over a number of years and so i think it suffers from the same problems that any fixed regime suffers for an independent scotland can i just clarify i mean when you say asymmetric competitive effect what's that in in real words that ordinary people would understand right well basically if you have an increase in the price of oil say say a dramatic increases we've seen at times when there's been war in the middle east or or whatever then there's a big spike in the price of oil so a producer of um of oil gets a huge increase a huge hit if you like in their inflation loosely speaking so their inflation rate goes up but the converse should be happening in countries which are oil importers by and large what does then the effect of that on industry in in scotland and on real people well that then has knock-on effects to your non-oil sector this is this is the crucial thing because scotland and of course the the euro area have a well diversified non-oil sector so if you're what we call the real exchange rate or your competitiveness is moving around a lot with oil prices as it would be in scotland that is knock-on effects for your non-oil sector i mean if you imagine the price goes up in the oil sector therefore the the basic mechanism is that wages will go up material inputs will be driven up in that sector and there are channels which push that into the non-oil sector and so it becomes uncompetitive and you you you essentially see the non-oil sector being squeezed out and that's a very real issue in scotland because of course the non-oil trade position is one of a very significant deficit and so that would make that situation worse and if it's not addressed by means of uh flexibility in your exchange rate you'll ultimately get to a situation where you won't have much of a non-oil sector because it will have been crowded out as we say by the by the oil sector. What would be the the situation i mean if if scotland applied to join the EU or was in the EU and obviously as we said earlier has to give that long term at least long term commitment to to join the euro what would happen if and it's the point that that might crock raised early in terms of you know the the S&P have said that if they're not going to have a formal currency union with the rest of the UK bus independence it's going to renaig on on accepting its fair share of the national debt now that was the case and surely scotland independent scotland was seen as a greater risk to the international money lenders and therefore that would i presume would impact negatively on borrowing but in terms of negotiations to join the the the euro at the end of the day the powers that be would they not see that kind of greater risk scenario being a problem for an independent scotland ultimately joining the euro and i think oem wants to come in on that point um i think the it's really because you're moving to a sort of general point about um the the process of joining the EU and the relationship between that process and and the euro the euro zone it is i think pretty much um a basic requirement for joining the EU that all international disputes or disagreements with other member states for absolutely certain but in general um are sorted out beforehand so there would i think and i say this are not on the basis of particularly talking to either side of the debate here but making you know really trying to talk to other decision makers in this process um so in other member states and and and institutions in brusles i think that is a really basic requirement so so the timing of all of this matters um if you are continuing to have some kind of dispute about the debt or something like that that will be a problem and it will also obviously make it more difficult for the UK the rest of the UK to play the leading role that it will need to play in terms of securing scotland's accession process or negotiation process depending on what you think about how that process will be followed on financial services industry in particular if you were in the euro zone you would also be joining the sort of caravan that is currently moving a bit sporadically but nonetheless is a big and really important caravan towards european banking union so it would have implications for the banking industry for sure and the financial services industry in general there is a lot of talk at the moment about the banking union going further there's ECB board members have given speeches about european capital markets and other things so it would also have an impact assuming as it will i think the rest of the UK remains you know with an opt out as it obviously will there's no suggestion that the rest of the UK would join the euro um you would then it would be quite a fundamental change in the um nature of the regulatory unit within which the Scottish industry is set anybody else want to pick up on the yeah so your point about um EU entry so i think to sort of shortcut long stories it's uh there's going to be a political negotiation in terms of entry however the political negotiation is predicated on the fact that the UK is supporting it now if scotland if taking the scenario that Mike painted said we are not taking a fair share of our debt well that debt doesn't disappear you know the rest of the UK then have a bigger debt burden per person and you know one would have to think whether that would be okay with the rest of the UK which presumably part of the negotiation and i assume there's other countries in Europe that would also like to walk away from their fair share of the debt as well but you know there's a lot of debt around these days so um you know i think it'd be grave to assume this would have no impact at all on those political discussions but they are political discussions and we haven't been in this situation before so it's um hypothesising really well i think we've covered a lot of stuff right into the um scotland's access to or entry into the the EU in other in other events and i think it's helpful to have to have it touched on here just to you know make the point that all these things that are related thank you yeah can i just pick up one point relating to the the previous um discussions that we had about sterlingisation and its and its potential collapse i mean is it possible to to foresee or likely to foresee a situation where sterlingisation is tried and collapses and then is a is a flight into the euro then a a logical path to take or in these circumstances is it even less credible to go for the euro than than you would if you were starting from that from scotch well i would say um yes it is less credible because of the oil effect if it wasn't for the oil effect then i think things would be very different but because of the oil effect i think the only um feasible option for an independent Scotland would be to have a separate currency which you know raises a number of other issues but i don't see collapse of sterling then try to use zone as as being uh successful for the reasons i gave earlier you go to really hit your not all export sector unless you can build up very significantly so is that general view this one just that maybe i'm i'm sorry less optimistic about the longevity of the oil industry than the run it is i mean we are in a situation where the amount of oil production has been falling very very consistently over the years there's still a lot out there where it's becoming increasingly costly to get it out so there is a i think a question balance here how much will be affecting uh the Scottish competitiveness 10 15 years from now can i just planify though i mean the the issues that would be faced by um Scotland are not 10 15 years from now i mean these the so the oil effect that provisible donald was referring to would be impacting on the decisions that were taken pretty much in the short term and unless i'm mistaken the consensus was that sterling isation wouldn't last that long and therefore scotland would be in a separate scotland being in a position of having to make a choice about what to do you possibly join the euro you know in a relatively short period and and the fact that oils on the right wouldn't you then come into it well i think it i think it wouldn't have an immediate option to join the euro i mean depends what what length of time we're talking about it if we're talking matters in months in relation to sterling isation there's no option but to go for your own currency it seems to me and then at some subsequent time of the future which it probably would be the long term future think about other options right so i am i was just going to add sorry i'm still showing ah there we are um i was just going to add to that um chairman that um a share um david bell's view that the euro may not be an option um in in early days because there would be conditions attached to um to an independent scotland's um entry there i mean it would be a very difficult situation because you know from what we've heard today the conditions that need to exist to support the sterling isation are absent in terms of the state of the annual public finances in scotland the reserves and the ability to build reserves and to support um such a regime just are not there i can't help you today with what would be the least worse alternative we haven't looked at this in detail in the cbi we don't have a member mandate but each of these options um we haven't ranked them as least desirable but they all are undesirable sorry mad mad so um i just want to clarify our uh position here um to join the euro first of all there's a process which i said joining the european union it's a political negotiation to join the euro is a different thing you know you can be a member of the european union not be part of the euro that's what the uk has um to join the euro you have to enter what's called er m 2 first of all which requires you to keep your currency stable for two years so you have this difficult intermediate period where the rules suggest and every country has had to do this that's gone into the euro where you'd have your own currency because you couldn't guarantee you could keep stoning stable that will depend on this other country called the rest of the uk so you have this awkward intermediate period where you'd have to have your own currency if you just stick by that process uh can i also just say that um you know none of us um uh the world economy may go on to a massive boom for the next 10 years none of us actually know how to crystal ball on any of these things all we can look at is the risks and exposures that are being created without saying exactly what passed on i mean the world economy might be absolutely you know booming like we've never seen it before in the next 10 years uh so i just i think that the portrayal uh speaking for myself that you know this would um necessarily on all circumstances lead to um uh a collapse that's not what i'm trying to say and what i'm trying to say is that our risks around serious risks around this exchange rate regime okay mike do you want to pick up then the issues about um all the currency all right uh we've dealt with um plan e which was monetary union as it's having been ruled out by the rest of the uk but if plan b was a sterling isation we've pretty much said that that would collapse pretty quickly uh plan c which is the euro um isn't a short term option and there are difficulties around the process of how you would get there so we're left with plan d uh which is the separate Scottish currency and there are many on both sides of the debate that are actually saying that this they should have been planning all along because it's potentially the best solution for scotland giving uh control over financial economic levers i mean is that the the situation is is is a separate scotland currency actually best for anybody scotland somebody's got their mic on yeah well as i say we we have not ranked these in terms of least worse but i think we need to look at the characteristics um of what a separate scotland currency would have um as you rightly say mike you know the the currency if it was floating um you know could move around um you know in a way that could take economic shocks and strains um that would that would not be able to to happen if we were tied tied to another currency but then introduce these other um problems so for example i mentioned that the the entry to the euro would cause exchange rate costs and risks between scotland and the rest of the united kingdom scotland's largest trading partner problem with a currency scotland having its own currency is that it would introduce these costs and risks to every other country in the world including the european union and the eurozone so you know that that for our members again you know is not um is not a good option costs would be introduced to their operations and in doing business that don't exist at the moment and when you compound that with over time different regulation that owens talked about um different laws rules taxes and so on the fear of our members is that the barriers to doing business across the united kingdom and into other jurisdictions here goes up and and not doubt or not stable so again on that particular one it's not a trying to an attractive option for our members well i'm interested that you're saying you know you're trying to identify the least worst option because the you know the arguments that we've already heard um earlier on with professor mcdonald for making this point that if you have effectively a petrol currency then the dangers to the rest of the Scottish economy must be quite large and yeah therefore having your own currency may be the best way of isolating yourselves from or protecting yourselves from from that sort of danger i mean is that is that i think that's a very fair point um and i suppose that the point i'm making is is that you know we haven't done um detailed work in the cbi to be able to rank these other unpalatable options into least palatable um and therefore i don't have a member mandate to come here today and tell you that well you know if we can't keep the pound sterling in a united kingdom then you know our preferred and least worst option is x i don't have a mandate to do that but what i can explore with you you know are the the costs and the risks um and the characteristics of the options that you're looking at and i hope that's helpful professor mcdonald you don't have a member mandate you don't need a member mandate what is what's what's the issue you know with a separate scottish currency is that best for actually the rest of scottish business um it would be in the long term um and but my concern is the transition to the longer medium to longer term and i say that because um if you're going to have a separate currency which addresses the oil issue the effect oil will have in your non oil sector it needs to be a managed currency it needs to be what we call a managed float now as angus said earlier that if you were to take the share of foreign exchange reserves that an independent scotland would be likely to get um it's between six and seven billion pounds now that's been described i think it was john k who's so aptly described it as a a handful of loose change for hedge funds what that means effectively is that you couldn't have a fixed or managed exchange rate to start with that these reserves are not sufficient to support a fixed exchange rate so you're going to have to have a flexible exchange rate as in mcmillan said and the key point about flexible exchange rates is they're very volatile and i believe they'd be especially volatile with the newly minted country as scotland would be where it would be facing we believe quite significant fiscal deficits it would be facing the the kind of debt issues that angus mentioned um so i believe the currency would be very volatile and it would have deleterious effects on on trade with particularly obviously with the rest of the uk our main trading partner now moving forward to get to a position where you could have a managed currency which would address the issues that you're going to have to face an independent scotland namely this petrol currency issue um you're going to have to do what was was argued earlier you're going to have to build up foreign exchange reserves significant foreign exchange reserves along i would think the example of hong kong to do that you're going to have to run fiscal surfaces there's no question about that now the the figure that we're running with at the moment for it's an independent scotland in 2016 is between five and seven percent for the fiscal deficit so if you're going to have your own currency and you're going to move towards managing that currency properly you're going to have to turn that deficit round and move it into a surplus to accumulate foreign exchange reserves now clearly that's going to be a very very painful process but that essentially is what you're going to have to do um there is no other alternative option for currency other than to have your own currency given the oil effect but if you do that then you're going to have this quite long protracted period of austerity i believe. Could you or another member of the panel just explain why there is the difficulty at startup of a new currency in pegging it to sterling or the euro or the dollar or or any other currency you want to choose well that that's effectively to say you're going to fix the change rate and to fix the exchange rate you've got to give an unlimited commitment to the markets that you're going to defend the rate you've chosen that's the commitment to give an unlimited commitment you've got to massive foreign exchange reserves because you would have to be buying yeah exactly to defend yeah your position and the only way and this is a point i didn't make but i think it's important on the only way that you could attenuate the volatility in the short term until you built up your foreign exchange reserves would be by by putting up your interest rate relative to your trading partner so interest rates would be higher than your trading partners with all the repercussions that would have for loans and mortgages and so on in the in the economy in order to attract you've got to stabilise the yeah essentially you've got to stabilise the currency and one of the the key ways you can do that is through interest rates that is one of the main drivers of of exchange okay i wonder if you just look lindsay do you want to come in on that particular point realistically how long would it take to establish a new currency in a central bank the actual what would hang in the interim is that something you've looked at is the the time frame um realistically i think it could be done in three to four years so people have done this before but they've never done it with the difficulty is the sophistication of the financial institutions yeah so what would be required is a whole new set of institutions for an independent scotland okay that's doable people have done this before that's perfectly reasonable that's that's fine the difficulty is to redenominate the contracts so your mortgage assuming you have one at the moment is installing i'm not sure where it's under Scottish or English law depends where you have it and so on and so forth but these since you're going to introduce a new currency you will have to redenominate the contracts now again that's a process that's being done people have introduced their own currency it's just here you've got very big financial institutions where you're going to have to look at their balance sheets as well and look at what redenomination will mean for them so um that that's the difficulty in the transitional arrangement that you've got a lot of institutional issues and redenomination costs which obviously brings in genuine uncertainty because we haven't been down this path before uh then you have the economic adjustment which has run has been saying um in order to allow people Scottish citizens and foreign investors to believe that this exchange rate can be maintained then you have to have confidence that Scotland is going to be able to have a robust balance of payments and one thing robust balance of payments requires is strong fiscal accounts you need to have a credible government using credible fiscal policy and perhaps at the beginning it's going to have to be particularly cautious um but I agree entirely with Ryan and David that at the beginning you'll be you would need to run substantial fiscal services for quite a number of years in order to build up those reserves for the the rainy days to be able to defend yourself and to be credible with your own citizens that actually there is enough reserves to pay for things like deposit insurance so you have the economic adjustment you have the institutional requirements and you have the legal issues such as redenomination those first two the redenomination institutions my guess is you could do it in between two and four years it's difficult but it's being done before four years would be two years into independence well you know well I think here this is where we get into the issue of um you know it would be in the rest of the UK's interests to make this as smooth adjustment as possible if if um people of Scotland decide they want to have independence and they want to have their own currency and there's a reasonable division of assets and liabilities then that's entirely their own right and why would the UK not be as co-operative as possible in trying to bring that about a stable and secure means as possible it will be in the rest of the UK's interests could I just clarify with that organisation couldn't be done sorry that couldn't be done though within the 18 month timetable that the Scottish government has set for for independence I think given where we are starting from today to do all of those changes in a uh I think it'd be difficult on that timetable to bring about all those changes of introducing your own currency and do all the redenomination and create the institutional framework you know be difficult in that time frame so that's a bluff then it's a combination of bluff and bluster it is well I think it's you know it's an issue of how what aspects could be taken over between two independent countries and still worked on still parts of the process some functions can be shared for example over the interim time period there would be ways of working this through um it is difficult um but it's certainly possible and it's been done before and I think it'll be erroneous to say that this is just not possible it is possible there are clearly risks this would be a very big job but it's possible yeah you say it's in their interest what would be the interim arrangements in terms of moving from a country union to a separate currency would it be standardisation I don't think that um so there's a presumption there that has to be an interim arrangement you um there would have to be uh an agreement for how you do the redenomination the institutional arrangements they can be shared for a period of time you know neighbours can share things um there are enough skilled people in the bank of England debt management office and so on you know you can have that that's possible the when you say share things like what well you need to build up a number of institutions you'd have to have a debt management office you'd have to have a central bank um you'd have to have a tax collection office you would have to have your own treasury uh you would have to have presumed your own currency printing mint somewhere presumed that would be by a central bank as it often is and you license it out to somebody so you'd have to create you know that's five of my head you'd have to create these institutions now since these institutions already exist in the united kingdom I think it'd be reasonable to expect to be everybody's interest to be as cold as possible because it is completely in people's democratic right to wish to go this way to have their own currency that's completely reasonable for people to cooperate to have that institutional framework it's actually what happened in Ireland there was a lot of cooperation despite the very much more difficult circumstances that they were going through with the creation of the Irish Free State and the obvious political tensions that were there at the time so I think those institutional arrangements could be cooperated but that's a very diff we're dealing in the issue here of Scotland creating its own currency and I agree with Ronnie when he said that it over the longer term this is the most credible option and I you know it's interesting that other European countries um of a similar size to Scotland Switzerland Norway Sweden Denmark guess what they have their own currencies and they don't die it is possible it gives you the most economic independence and what you do with that independence is responsibility of an independent country that's what happens I'm not dating the ability to establish your own currency but I'm interested in its transition arrangements yeah no I understand at a transition rate it's extremely difficult because they the legal ones are the other comments yeah for that three four year period yes I mean to be fair that the yes side is divided in this I mean I think we've got the Greens the Scottish Socialists Dennis Canavan all arguing that the logic is for a for a separate Scottish currency but that's not what's an offer as I understand it I mean the yes campaign's position officially in the SNP and the Scottish Government's position is that it would be well a shared currency which I think we've identified is is not on the table but Owen you wanted to come in on this um only uh just on the specific point of the the transition the UBS global research say that sterlingisation would be the transitional arrangement I mean they make that that that point uh since Scotland won't have time to create a new currency whereas the currency separation as we've already discussed will be driven by by customer preference um we actually advised our members several months ago that in their contingency planning a new currency was probably the most likely outcome in the longer term and since then as I've mentioned quite a lot of the analysts within the industry at the high level have come to the same conclusion so I mean in many ways many of the questions we have been discussing are sort of answered once you posit a new currency because as as as Angus has just said I mean we kind of know how that works because it happens everywhere I just wanted briefly as well to add to the list of institutions that Angus was mentioning that will be required I understand that the if you have a new currency you also need to introduce new clearing and payment systems and in banking I think that is a big deal and I think that does take quite a long time I don't know how long but I think it is a really really big undertaking and and finally just a perhaps going back to the discussion we had earlier on mortgages one of our members has done quite a lot of work on what happens when you introduce a new currency and then you separate the value of the of the of the love and if it is a if it is an existing mortgage loan it's almost certainly denominated in sterling and it might be written into the contract if there is a currency bit of the contract but then obviously the value of your property would then be would then be denominated in standard security as in the new currency so you you would have to manage the transition between of that process now my understanding which is very limited is that in when this happened in Eastern Europe recently where people have been borrowing in euro and then the foreign for example sort of really went downhill I think the government intervened and somehow moved to sort of re-denominate mortgages so either you either you leave individuals to have that risk of the value of their property being separated from the value of their loan or you intervene as I guess one could contemplate to transfer that that currency risk to to the banks en masse but that's something that presumably one would have to look at in the process of introducing a new currency. Can I just clarify a couple of points about the the moving from here to there as it were I mean I think we've already come out and indicated that in our view a separate currency for a separate Scotland was the least undesirable of the options. What I'm not clear about is whether or not given that the Scottish government has said that they want to be independent in 18 months whether it is possible to combine that with it with a longer period before the separate currency is set up where you have perhaps a shared currency or a currency union for a period on the understanding that that then means that the Scottish government can't take a whole number of decisions until such time as the the joint or if the single currency its own currency is established is that feasible as an alternative to leaving the United Kingdom sterling isation and then a separate currency or is there another choice about how this can be done or does the 18 months have to be abandoned but it seems to me that there's a number of things being suggested here which are mutually incompatible and I'm not clear which is the least bad in the sense to to give up yes or no. Well I think I think that in short the 18 months period is far too short I mean I'm unaware of any country or any two countries or any two units of the sophistication of Scotland the rest of the UK in terms of their financial integration their trade integration separating in the way that is being proposed by the by the Scottish government so there's no precedent for this really and I think it would take much much longer than 18 months just for the the physical institutions to be put in place but I would think that a clean break in terms of currency would be the best way in the sense that any arrangement that you if you become independent and then you've foist on the country a currency arrangement which isn't appropriate because of all the effects we mentioned earlier then you know what how is that sustainable I can't see it being sustainable unless you're going to have commitment from say the Bank of England to underwrite this this this this transitory currency arrangement but I can't see our UK taxpayers being too happy about doing that so I would think you would have to have a longer you know a longer transition in terms of the 18 month period to set the whole thing up but then on day one of independence you do move to the separate currency but when you do that you've then got another transition which is the one we were talking about the economic transition which is one in which you've got to have higher interest rates and probably an austerity programme to build up foreign exchange reserves but that that would then mean that the Scottish Government would have to decide that it was willing to extend 18 months because if there's a yes vote and the Scottish Government has gone into that referendum saying we will be independent in 18 months it's not then really for the rest of the UK to say no the Scottish Government would have to decide that they were going to break their pledge essentially and say that we would remain part of the United Kingdom until such time as all these other institutions were established now is is that a reasonable summation I mean in terms of what we call for I mean I think it's it's it's is it appropriate for us to be saying that the Scottish Government I've got to clarify whether or not they're going to stick to their 18 months or whether or not they're willing to extend it in order that these other institutions can be established to allow potentially the establishment of a separate currency well I would I would strongly say yes they would have to extend that period for the reasons that we've we've all been discussing I think it would be so much uncertainty in that period which would be so incredibly damaging to the Scottish economy and I believe the rest of the UK that I really do think it would need to be extended I don't think there's any other other other way is that a consensus view amongst those of you that feel able to see anything without the danger of being monstered by either your members or the Scottish Government Ian well I think that you know the Scottish Government would need to be prepared to extend the period if they found in practice that that the 18 month period just wasn't going to work out because the negotiations were taking longer but again the problem is that that puts that puts business between a rock and a hard place because it extends the period of uncertainty from 18 months to whatever the period turns out to be so you know again you know I come back to this of course the decision is a matter for the people of Scotland and you know we'll respect that decision but I think that the the uncertainties and the potential costs involved you know are a matter of concern you know for for for our members so look I mean I'm sure I I you know speak on behalf of all raft of people in the political world when I say that business can't go on complaining about uncertainty on the other hand not actually say anything I mean if they if they have these concerns and have a view then they ought to actually you know find it within themselves to have the courage of their conviction and say things I mean I notice you know and I think quite commendably Babcock has come out recently and said what it believes the impact would be and agree or disagree at least they've made it clear what the the position perhaps you ought to take it back to your members and indeed you know your own members as well Mr Kelly you know that they ought to be spelling out perhaps a bit more than they've been willing to do up to now what the consequences are of these various options as well as the you know the general decision overall so am I right in thinking that we have possibly identified what should be the Scottish government's plan B in the event that a currency union is not accepted I mean that the least bound seems to be the idea of a separate currency but with an extended you know introduction period now unfortunately again nodding doesn't cut it well yes somebody's got to say something well as you can imagine I would I would strongly vote for that yeah definitely the others I would say that this risk of redenomination exists from day one and there's a question about how you manage who bears the costs of that risk so in other words everyone will be aware that there is now a possibility of a new currency existing there's a whole set of institutions to put in place but that risk will have to be managed throughout this period and that is going to be an extremely tricky process to avoid the kind of capital flight issues that we've already been discussing so I mean what I'm saying is it's not just as simple as setting up the institutions maybe over a longer time horizon there is this risk that has to be managed and presumably that raises then one of the issues that we were going to come back to which is the question of lender a last resort or who ultimately stands behind this whole process but presumably the UK government and the Bank of England if there were circumstances where it was agreed that we were moving towards a separate currency with you know general goodwill and so on and so forth that would have to be part of the package I mean that the assumption in those circumstances would be it would have to be the bank of england in the UK government because there is nobody else well yes I mean we've already discussed the fact that the Scottish government would not have access to sufficient funds to kind of back up this process and that of course then brings back into sharp focus the question of the debt because if you're going to rely on the bank of England in the UK government to do stuff for you they are going to say well you're going to give you a population share of the debt so on the the transition arrangements have already gone through I just want to pick up on something that Owen and Ronnie touched on this idea of a temporary or an interim or an in-between thing where you can do a bit of stone stone organisation until everything's calm and nobody notices and then do another change I just don't think that's I think if something if you know in the medium to longer term the best way to do this is to operate your own currency then it's better to do that rather go for the interim stage now the reasons are first temporary arrangements of financial markets as Ronnie will tell you become very temporary if you're not careful you know people know there's an end to this so having a temporary currency arrangement and expecting nobody's notice no foreign investors or capital flight not to think this might come to an end you've already told them it's coming to an end and that was the Czech slow back issue they created a temporary currency union well guess what it's temporary I'm moving my money today so the first thing is this temporary issue is it's easy to say but it's much harder to do in practice the next thing is if you go to this temporary stone organisation thing well in doing that you're going to get rid of what is currently a Scottish currency called Scottish notes that you're going to have to bring back again at some point in the future so why don't you do that and you're going to make sure everybody's contracts are going to be written into sterling when you're going to eventually one day bring in a different currency which is going to make it even harder so that interim one although it kind of is kicking the can down the road and makes it look like you can just put this thing off I think that if you would agree and I think that probably is a consensus that for an independent country the size of sophistication of Scotland having your own currency over the medium to longer term is the right way gives you most economic independence and responsibility and so on and economic levers then it's better that that was resolved earlier rather than leaving it later and therefore those institutional arrangements and as David quite rightly pointed out the things like re-denomination were brought about sooner rather than trying to have some sort of clever way of doing a temporary fix of the short term but that cannot be done within 18 months my personal view is as I've mentioned I think it would take two to four years to do this sort of change now I picked those numbers carefully but I think that the the reason why I did that is because I think under this arrangement it would be in the rest of the UK's interests to completely and that's why wouldn't you cooperate that it did in Ireland it would be in everybody's interest nobody wants to get these banks having a difficult time you know 80% of them are owned by us or one of them anyway RBS is owned by us it's in our interest to make this process function smoothly and in doing so if you know people of Scotland want to have independent country and I understand that what I don't quite understand is the incompatibility between that sort of two to four year period and the 18 month period and you spoke about an interregnum you know temporary but presumably from the day of a yes vote to the establishment of a new currency is going to be a period of flux and potential capital flight and gnomes you know potentially taking action and all the rest of it and I'm not quite clear how any of that can be can be managed successfully and the short answer is that we don't know for sure that it can be managed successfully it is a risk but you are better to have that risk managed by the government north of the border and the government south of the border working together to try and manage that risk does that risk disappear because that course not there's still risks around it there will be enormous risks in this transition but you'd have both sides interest to try and make this work to come to a reasonable conclusion and what might be the impact would be up in my constituents mortgages during this interregnum well first of all it would depend on on what where those institutions were deciding to locate so in what one would want it see the difficulty here is had an independent Scotland run fiscal services for a number of years so we know that you know in future you will have enough reserved blah blah blah then okay so the first thing you'd like to see is you know a very prudent fiscal policy to give people confidence that actually there will be these reserves built up and sound finances and so on without that I think that there is a risk that some of these financial institutions decide to change their location simply to avoid what will be difficult decisions but that would mean I mean unless I'm mistaken translated into into laymen's terms that would mean that a Scottish Government which had just won a referendum for independence would be required to introduce a programme of increases in taxis and cuts in spending in order to provide a stable currency that's in order to generate fiscal service yes that's what they'd have to do to get a fiscal service you have to get a fiscal service you have to get more income and spend less that's not the prospect this is being offered to people at the moment I can't help on that one I'm just saying you get a fiscal service by getting more revenue than you do spending gosh better well it's just in that context then you know I mean I'm seeking again to clarify the impact upon my constituents mortgages and you know you responded that if the Scottish Government wanted to keep mortgages and other things stable then they would have to introduce a programme of cuts in expenditure and increase in ta