Last week, financial markets for the first time began to take seriously the possibility that Scotland might vote ‘yes’ to independence.

The issues fall into three groups – currency risk, government credit risk, and all the credit risk associated with financial institutions.  The position on currency is today a standoff.  The Scottish government has said it will negotiate a currency union and the Westminster government has said it will not enter such negotiation.  But the Scottish government cannot unilaterally establish a currency union and the Westminster government cannot unilaterally stop Scotland using sterling.  Plainly there has to be some agreement.  But might this agreement leave people who had made deposits or loans in sterling find themselves repaid in bawbees of doubtful value?

As the eurozone has discovered, establishing a currency union is easy, operating one is difficult, and unwinding one is very difficult.  You can pass legislation which says that all contracts made in drachmas are now payable in euros, but legislation which says that contracts made in euros are now payable in drachmas is another matter.  To which contracts does the latter provision apply?  However the question is answered, the answer will hurt many businesses and individuals and occupy much time in the Courts.

But there is a simple answer in the Scottish case, which is that contracts in sterling remain in sterling.  The same answer is not possible for Greece, because the whole point of Grexit is to enable the country to default on its debts and effect a large devaluation:  but that would be both unnecessary and unwise for Scotland.  And if the matter is resolved in that way, the currency risk should be minimised.

British government stocks took a tumble in the news from the opinion polls – perhaps because markets did not know what to make of the news, perhaps because of the Scottish government’s threat to renege on its share of the UK debt.   But even if the Scots carried out the threat, it would add less than 10% to the debt servicing cost of the rest of the UK – a burden which, at around 2 ½ % of GDP is hardly unaffordable.  There is little justification for believing that it would affect the UK’s credit rating:  what it would do to Scotland’s credit rating is another matter altogether.  It is one thing to start life as a new country debt free, another thing to do so because you have just defaulted to the extent of £100bn or so.

The third issue is the credit risk attached to particular financial institutions.  These businesses can operate within the EU through branches of their home institutions, or by establishing local subsidiaries state by state.  The Swedish Handelsbanken uses branches, while the Spanish Santander takes deposits in Scotland under Scots law, with its English subsidiary.  If a bank fails, the saver has a claim on the appropriate deposit protection scheme, which is that of the country in which the particular entity within which he or she is dealing is located.  As in the case of Santander, that country might neither be the country where you made the deposit nor the country where the bank’s head office is located.

Who will provide liquidity support if there is a ‘run’ on a bank (the so-called lender of last resort facility).  The discussion of the Governor of the Bank of England’s evidence at the Treasury Select Committee comprehensively confused the two quite separate issues of the reserves needed to sustain a currency peg and the resources needed to provide liquidity support to the banking system.  Liquidity support to solvent institutions depends on the credit rating of the provider, while the scale of modern speculative capital flows is such that there is no currency reserve large enough to sustain the price of a clearly overvalued currency.

This issue of ‘lender of last resort’ is, since the global financial crisis, confused with another issue:  who (if anyone) will make whole the other creditors of a failing financial institution or recapitalise an institutions which is unable to raise equity on the markets for itself.  The only sensible answer to that question – for Scotland and for other countries – is ‘not us’.

The present debate is cheapened by posturing and scaremongering – on both sides.  Scotland could prosper as an independent country, and has prospered as part of a United Kingdom.  The substantive issues are those of identity and values, not economics.  And whatever outcome is declared on Friday morning, sensible people will come together to make that outcome work.