Bond market waits for Scotland's 'kilts'

For a month now, Scotland has possessed one of the most important powers that a sovereign authority has at its disposal. The ability to issue debt.

Yet in spite of fighting for the right to access capital markets directly, Scottish ministers have resisted taking the plunge and remain tight-lipped about their plans.

Since April, Scotland has had the right to borrow up to £2.2bn, although the UK Treasury has indicated borrowing should not exceed 10 per cent of its capital budget, giving a limit of £304m for 2015-16.

Holyrood is keeping its cards close to its chest. Global agencies have yet to issue Scotland a credit rating, the usual precursor to a bond debut although not a prerequisite for a sale.

"The Scottish government will be able to borrow from the National Loans Fund, from banks on commercial terms or through issuing bonds," a spokesman told the Financial Times this week. "We are evaluating these options for borrowing and will in due course take a decision on which method or methods to use based on the prevailing economic conditions."

Their caution is understandable. Scottish bonds will not be underwritten by the British government, meaning that the interest rate Scotland attains will be a public indication of the way the country is regarded by investors around the world.

Last year Scotland voted No to independence from the UK in a close-fought referendum that some expect may ensue once more following the triumph for the Scottish National Party in last week's general election.

However, the outlook for the Scottish economy has dimmed since the referendum after the collapse in the price of crude oil - Scotland's main export.

Mark Carney, the governor of the Bank of England, has called the oil price drop a negative shock to the Scottish economy, but one substantially mitigated by the fiscal arrangements within the UK.

Careful planning to ensure the best rate possible may also have been thrown into confusion by the recent upswing in volatility across global bond markets, including the UK.

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For Scotland, this represents the chance to issue bonds, nicknamed kilts, at a low rate. Responses to a Treasury consultation last year suggested Scottish bonds would be priced in relation to the gilts market, with Scotland's borrowing costs anywhere between 35 to 130 basis points above the UK's.

However, recent instability in bond markets has pushed prices lower.

Scotland's right to issue bonds marks the first time a devolved administration has been given the power to do so and heralds the start of further devolution in the UK.

In February, the government set out proposals for the Welsh government to issue its own bonds directly on capital markets, while Britain's local authorities will soon be able to borrow money via a newly created municipal debt agency, the Local Capital Finance Company.

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