An independent Scotland’s borrowing costs on international markets would be higher than the United Kingdom’s existing rate, a major credit rating agency has warned – but the situation could be turned around over time.

“The most likely scenario is that Scotland would be rated somewhere in the middle of investment grade, though at least two notches below the UK’s rating. An ‘A’ rating is the most likely at the outset, but with risks of a different outcome tilted to the downside.

“Over time, greater clarity over (and confidence in) Scotland’s institutional structure and measures to address longer-term fiscal issues could make higher rating levels attainable,” said Moody’s.

Significantly, Moody’s backed the British government’s arguments that it would not be in the interests of the United Kingdom to allow Scotland to continue to use sterling – the preferred course now backed by Scottish First Minister Alex Salmond.

“If Scotland were to retain the pound sterling as its currency and the Bank of England as its central bank, this would be credit negative for the remainder of the UK, regardless of the institutional arrangements that are put in place.

“This would be particularly true if an independent Scotland were not also subject to binding fiscal coordination and banking union with the remaining UK,” said the credit rating agency.