Did the ratings agencies say Scotland would be AAA?

When Standard and Poors published their report on an Independent Scotland it was a careful and considered view of the risks which would face Scotland in the event of a yes vote.

Unlike other ratings agencies - such as Moody's - S&P did not publish a preliminary credit rating for an independent Scotland but rather attempted to provide an overall narrative of the issues facing Scotland. As you would expect this covered the positives and negatives for Scotland, the trouble was that in the febrile atmosphere of the independence referendum the nats would take any positive they could get and the report was unfairly reported out of context by many people who had obviously not read the full report.

Thus was born the meme that S&P had given Scotland a AAA rating.

Aided and abetted by the Yes leadership nudges and prods were given in the direction of Scotland’s AAA status without actually saying that it had been given. 

Take this egregious example from Business for Scotland, who are not well know for letting the facts get in the way of their own special reality.

Note the headline which uses “could” but then reading the text about the “massive blow” to Better Together and the “emphatic” statement about the positives for Scotland - in reality the report wasn’t emphatic it was extremely well balanced.

For example whilst Business for Scotland note that the report “emphatically” says Scotland could float its own currency it actual fact S&P noted that, whilst possible, this would be hard going for Scotland.

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 U.K.

However of all the comments made by S&P this was probably the most oft quoted by nats who did not even understand its meaning

The proximity to AAA ratings along with the line “Scotland would qualify for our highest economic assessment” was taken by many nats to mean that Scotland would be AAA.

Far from it.

It’s important to understand the context of S&Ps work. As a ratings agency they look at sovereign debt from countries of all shapes and sizes. In relative terms Scotland is a wealthy western economy, in that respect it would be subject to S&Ps highest economic assessment - which simply means that S&P would not consider Scottish debt to be junk status. Which they explicitly state:

So Scotland would be BBB- or higher according to S&P. That’s a good rating and one that Scotland could be happy with, but it’s not AAA and at no point did S&P say or hint that it would be. You’d be forgiven for being shocked about that conclusion if you read the Business for Scotland piece, however if that piece was issued by a real business it would be removed for false and misleading advertising.

Incidentally one of the reasons why the nats never wanted to look at the far more comprehensive reports on an independent Scotland from Moody’s, and why Business for Scotland never wrote a puff piece on them, was that they went into incredible detail about an independent Scotland and it was very uncomfortable reading.  

You can read each one here, here and here.

But their conclusion on their rating is all important. In this they did not depart from S&Ps views and Scotland qualified for a non junk bond status of A, below that of the UK and similar to Malta or Mexico or Poland.

Of course much of this was subject to Scotland obtaining the prized Currency Union in the White Paper and the oil price staying at its current levels. In reality an independent Scotland would have started with a rating even lower than that predicted by Moody's in these reports and may well have fallen to junk status.

This matters greatly because it's the ratings agencies that set the benchmark for other investors when it comes to pricing debt and indeed are often the gatekeepers to large swathes of capital. This would have forced an independent Scotland to raise interest rates which would not only have affected people with mortgages in the new Scottish currency, but slowed investment and increased the cost of debt repayments to rUK.

No wonder that the nats attempted to pervert a well researched report from S&P into the economic position of an independent Scotland. Rather than face up the the reality of the difficult choices that lay ahead. Fantasy, denial and selective editing became the only choice available to an increasingly panicky Yes campaign.