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UK grants Scotland powers to issue its own bonds

Wednesday, 19 Feb 2014 | 2:29 AM ET

The British government has granted Scotland the power to issue its own bonds, but has warned the cost of borrowing for the Scottish is unlikely to be "cost-effective", as Scotland steps up its independence campaign.

The British Treasury said Scotland will be able to raise up to £2.2 billion ($3.7 billion) through debt capital markets, the same amount the region is currently able to borrow for capital investment from the U.K. via a national loan fund.

(Read more: Scotland's Salmond: blocking pound will hurt UK)

The announcement comes amid the Scottish independence debate, which will be decided in September when Scots vote on whether to dissolve the 307-year old union with England.

Jeremy Sutton-Hibbert | Getty Images

The region's direct access to the bond market comes with the caveat that the cost of borrowing would be significantly higher than the U.K.

"This expected higher cost of borrowing reflects the market's view of the Scottish Government as a worse credit risk than the U.K. as a whole and of the lower liquidity of Scottish Government debt," said the Treasury.

(Read more: Britain says Scotland would lose the pound if it leaves UK)

Prime minister David Cameron has made it clear that he wants the union between England and Scotland to remain intact and in a recent speech he made a plea to Scottish voters to stay in the U.K.

U.K. finance minister George Osborne has warned Scotland that Britain would not enter into a currency union if it voted 'Yes' in September's referendum and that sterling is off-limits.

(Read more: Carney to Scotland: Be careful what you wish for)

European Commission President Jose Manuel Barroso has also waded in on the debate, suggesting it would be "extremely difficult, if not impossible" for an independent Scotland to join the European Union.

Scotland's bid for independence follow a consultation in 2012 and "fulfils a key desire of the Scottish Government". The new power to issue its own bonds while remaining in the U.K. is further evidence that Scotland can have the "best of both worlds" according to the George Osborne.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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