Independent Scotland might need big currency reserves - Bank of England

LONDON (Reuters) - An independent Scotland would need big stockpiles of sterling if the country adopted the pound without an agreement with the rest of the United Kingdom, Bank of England Governor Mark Carney said on Wednesday.

Bank of England Governor Mark Carney delivers his keynote speech at the annual Trades Union Congress (TUC), in Liverpool, northern England September 9, 2014. REUTERS/Phil Noble

Scotland’s future currency arrangements are a disputed topic in the run-up to next week’s referendum over whether to dissolve the 307-year-old union with the rest of the United Kingdom.

Scottish National Party leader Alex Salmond has said he wants to retain sterling, but the leaders of Britain’s other main political parties have said they will not allow this.

If an independent Scotland continued to use sterling without having the Bank as a lender of last resort for its large financial sector, Carney said it would need large sterling reserves for its banks to be stable.

“The size of the reserves is one of the most important factors that determines the credibility. It’s not the sole factor but it is important,” Carney said in response to questions from British lawmakers in London.

Recent polls have shown the campaign for independence gaining support to run neck-and-neck with the “No” campaign.

Carney said Scotland might need to set aside money equivalent to a year’s economic output - around 130 billion pounds - to guarantee bank deposits and be a credible lender of last resort.

This would bring it into line with Hong Kong, which has a currency pegged to the U.S. dollar, and a large financial sector like Scotland’s.

Some other countries with currency pegs - which Carney viewed as similar to a Scottish “sterlingisation” scenario - managed with lower reserves.

For example, Baltic states had reserves of around 25 percent of GDP, but they had small financial sectors and were aiming to join the euro - something Salmond has ruled out.

The opponents of independence have sought to highlight the risks of “sterlingisation” in Scotland and Carney’s comments on the need to build up big reserves may give them fresh ammunition.

Carney told MPs that a country adopting a foreign currency would need to run surpluses in its balance of payments and public finances in order to build up enough reserves.

Some economists have said the spending promises of the Scottish National Party would have to be scaled back in order to run a budget surplus.

Reporting by David Milliken; writing by William Schomberg; Editing by Ruth Pitchford