I don't know about you but my heart sank when I read the reports of analysis by Jim Leaviss, a fund manager at M&G Group, which suggests that an independent Scotland could struggle to sustain the top triple-A credit rating on its sovereign debt. Whatever the merits of Jim Leaviss' analysis, the issue that may be a factor in the Scottish public's consideration of independence is whether the cost of Scottish sovereign borrowing may be higher than UK borrowing costs, and if so, by how much. The likely views of the ratings agencies are largely a non-sequitur.
The reason is that borrowing rates do not necessarily follow the ratings of the agencies. The markets make up their own mind. This is because the record of the ratings agencies is not good in rating private or corporate debt - see this article in the Scotsman by Peter Jones. And their record is exceptionally poor in rating sovereign debt - see this post by Jonathan Portes. Paul Krugman notes that Moody's and S&P downgraded Japanese debt in 2002, with Moody's actually putting it below Botswana and Estonia. Yet, 8 years later, Japan can still borrow at less than 1 percent. Moreover as Mike Konzcal points out
The .. bond market is one of the largest, most-liquid, most-studied, most transparent markets in the world. There's nothing the ratings agencies have that anyone else doesn't have. And what's more important, the ratings agencies own internal analysis shows that they are terrible at rating government debt. Their ratings are all off, as government, especially those with a printing press for their own currency, simply don't behave like the corporate world they were designed to analyze. And rather than just being wrong, they are wrong in that they are always overestimating the likelihood that governments will default.
So, forget the likely views of the ratings agencies, there are more important issues to consider in the debate on independence.
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