Is the crash really Scotland’s “financial Culloden?”

There’s a grim irony that, just as Gordon Brown and Alistair Darling are rebuilding their reputations at home and abroad, their homeland appears to be in a deep gloom.

While this morning’s Financial Times refers to Brown being hailed as a hero around the world, back home there’s a warning his rescue plan – involving part nationalisation of Scotland’s two biggest banks – cloaks a “financial Culloden” for Scotland. Bill Jamieson writes in the Scotsman:

“This is a massive humiliation for Scotland’s banks. The injection of government money through preference shares that will yield 12 per cent crushes the interests of the ordinary shareholders.

[...] I fear that, once the panic and hysteria that overwhelmed markets in the past month have subsided, this deal will create a blazing resentment among shareholders. They will see it as a Treaty of Versailles of finance, with the banks bent double by crushing reparations.

Humiliation? For the banks, yes. Resentment? I’m not so sure. It would be hard to have too much sympathy for those “ordinary shareholders”, whose holdings were, at least, rendered worth something by the rescue. They’d had warnings, as the Scotsman itself reported earlier in the year, and many would have enjoyed the ride on the way up.

No, to find the true impact you need to think a little big bigger, alas. It’s the elephant in the room spotted, elsewhere in the same paper, by Peter Jones.

“”Prudent, cautious, responsible” and “stable, reliable, solid” – the characteristics of three centuries of Scottish bankers and their banks all seemed instantly vaporised the moment it was announced yesterday that Royal Bank of Scotland and Halifax Bank of Scotland had been forced to collapse into government ownership.

The humiliation of this admission of catastrophic failure, the injury inflicted on national morale, the shame of having to go cap-in-hand to politicians, will reverberate around the nation for years, with as yet incalculable consequences for the political economy of Scotland.”

It’s Jones’ “national morale” point that interests me most.

These extraordinary events must, surely, have an impact on Scottish nationalism, which has been enjoying a resurgence in recent years.

Two questions. First, could Scotland ever, really, be independent while London owns a big chunk of the national banks? Would it want to be? Of course, you could argue that London always did own a big bit of these huge, multinational businesses, but not the government, specifically.

Second, could an independent Scotland possibly have funded the help now being given to RBS and HBOS? Even in good times cash would be a little more tight in an independent Scotland; shoving £37bn on the national balance sheet could have provided a debt for generations, even if you believe (as I do) it might turn out a decent investment in the end for the taxpayer.

Tackling the second question first, last weekend’s Scotland on Sunday could only unearth generalities on how an independent Scotland would cope. There were some suggestions a Prime Minister Salmond could follow Ireland’s lead in guaranteeing all deposits, although a Scotland in the Eurozone could do little by itself about interest rates.

There’s an interesting discussion below the piece that points out Iceland – used as a role model by Salmond in the past – was never a good example for Scotland, because it has a smaller, less diversified economy. But there is, also, the general admission this is a global problem over which a single nation – whatever its size – has limited power.

The most chilling quote on what would have happened in an independent Scotland was left to the end of the piece, and it was supplied by a senior (presumably unionist) Scottish banker.

“HBOS would have gone bust and RBS would have followed five days later. The Scottish state simply wouldn’t have enough money to rescue two banks of that size as Iceland has done. As it would have been a Scottish problem rather than a British one – they’d both have gone to the wall.”

That’s not a consensus view, either among commenters at the Scotsman or voices on other publications.

At the Spectator, Fraser Nelson argues that London (with some added Brussels for good measure) would wade in to save RBS and HBOS whether Scotland was independent or not. He thinks a combination of Brown protecting a British banking network, and the European Central Bank swooping “like a vulture trying to nationalise the banks of Scotland for the everlasting glory of Brussels” would have picked up the pieces.

That rather answers my first question; were Nelson right, we’d have ended up with today’s actual arrangement whether or not Scotland had gone it alone.

Just to cheer us up, Nelson also notes that Scotland’s last spell of independence ended with the Darien Disaster, which led to Icelandic-style bankruptcy and union with England. That latter fate, he warns, may still await Iceland (“at gunpoint”) if relations don’t improve soon.

We certainly can’t argue any more that it’s just nationalists who are miserable now.