Scottish referendum creates uncertainty for inter-authority lenders

Concerns have been raised that some longer term lenders are steering clear of Scottish councils in the run up to this September’s referendum on independence.
A number of delegates at CIPFA’s Scottish Treasury Management Forum in Dunblane last week said that their councils had been turned down for loans due to uncertainty over the future sovereignty of the country.
During a panel session, Brian Livingston, executive director of finance and resources at Fife Council said that his authority has now been turned down by lenders twice in the past year.
He said: “I brushed it aside as a blip. However, as recently as yesterday we were offered another deal by a broker and the same thing happened – the broker came back and said the offer was not on the table to a Scottish local authority. It looked like a blip but it is beginning to feature more prominently now.
“We asked the broker are you starting to see Scotland as a different risk due to the the referendum?
“The reply was that there were a few lenders who do. That does cause me concern because of the price we might have to take.”
Speaking to Room151, Mike Jensen, chief investment officer at Lancashire County Council, said that for some lenders, the choice was between lending or not lending, rather than adjusting the rate for Scottish local authorities.
He said: “Given that there are still six months to the vote and then there will be an interregnum of 18 months, then two year loans are doable – but ten year ones probably aren’t.”
David Couling, broker at Tullet Prebon told Room151 that it was only a small number of authorities which were currently not lending to Scottish councils.
He said: “Some may have thought let’s just wait and see the outcome of the vote, but it is an uncertainty issue, rather than a credit issue.”
Speaking at the conference, Scott Jamieson, head of multi-asset investing at Kames Capital, warned that, “the uncertainty caused around what is Scotland in the global market context runs the risk of causing a destruction of growth potential that might never be restored.”
And  he warned that a “yes” vote could lead to a lack of liquidity, highlighting recent problems in New Zealand.
He said:  “Liquidity there has collapsed in recent months because China is undergoing some challenges. For New Zealand read Scotland. For China read the oil price. When the wind is in your face it can become a howling gale very quickly.”
The concern was echoed by a briefing paper released by ratings agency Standard & Poors this week, which said: “A decision by a sovereign Scotland to issue its own new and untested currency or to unilaterally adopt the currency of another sovereign without gaining access to that currency’s lender of last resort, could pose some initial risks to external financing, in our opinion.
“Specifically, we think Scotland would be hard-pressed, under a new currency regime, to quickly replicate the deep capital markets it enjoys today as part of the larger UK.”
But it said that, even excluding North Sea output and calculating per capita GDP only by looking at onshore income, “Scotland would qualify for our highest economic assessment”. “In short”, the report concluded, “the challenge for Scotland to go it alone would be significant, but not unsurpassable”.