@insto - reply to your query:
"We shouldn't see reserves as collateral for government debt, but rather as the means by which a country intervenes (if it wishes to) to support the value of the currency. Think only about the size of Bank of England reserves relative to the UK government debt to see that reserves can have no collateral effect. Even for intervention in the currency markets, the lesson of Black Wednesday in 1992 is that the UK's reserves are in now way adequate to allow the UK government to determine the value of the currency in this way. The difference between no reserves and, say, £4 billion wouldn't stop Scotland being in the same position.
An independent Scotland would have to borrow to meet its fiscal deficit and finance any legacy debts it assumes. My point was only that it's better to start at as low a debt to GDP level as possible, and the markets will price a relatively low level more favourably.
On the million dollar final question, there are simply too many uncertainties to try to put a sensible figure on it. Some issues to bear in mind, though:
1. Scotland would almost certainly be rated below rUK (Moodys goes for a A rating), although the lower the debt, the higher the rating. Not a disastrous rating by any means, but below rUK. There's so much going on in government bond yields that we have to be very cautious about extrapolating much, but the difference between Austria (AA+) to Slovakia (A) is of the order of 0.50% on ECB figures. The increase in UK indebtedness if Scotland didn't assume the debt seems likely to immaterial to the rating.
2. Smaller, less liquid borrowers nearly always borrow at higher yields than the market benchmark. Finland borrows (to the extent it borrows) at a higher yield than Germany, for example. It's not usually a large gap, though: about 0.25% on the latest ECB figures. Scotland would obviously be a smaller, less liquid borrower than the UK.
3. These governments are all obviously borrowing in euros, a currency none of them can print at will. So these guesstimates might hold for both Scotland and the rUK borrowing in euros or dollars. The Bank of England can print as many pounds as it wishes. The impact of that for relative borrowing costs then depends on negotiations on monetary relations between the two countries. So, frustratingly, we're back where we started. It is worth noting, however, that countries borrow in currencies they can't print all the time, even ignoring the special case of the euro. The UK has borrowed in euros and US dollars, Italy has borrowed in sterling and yen, Denmark and Sweden in most major currencies etc. The potential issue for Scotland could be the size of such borrowing relative to GDP, but the market reaction would not be a theatrical 'You want to do whaaat?'
4. Finally, there are a series of technical issues around this question, which have unsurprisingly not surfaced in the debate. Repo markets, bank liquidity requirements and many more. One is worth highlighting: the nature of domestic demand for any government debt. This will make a huge difference. Would domestic pension funds be required to hold Scottish government debt? Would individual investors be actively courted? Braveheart bonds, anyone?"
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