THE UK has become the first large economy in the financial crisis to be warned that it might lose its top-notch credit rating, in a move that raises fears of possible downgrades for other big industrialised nations.
Credit ratings agency Standard and Poor’s (SP) yesterday warned that the medium-term outlook on the UK’s triple-A rating on its debt was now “negative” rather than “stable” for the first time since it started analysing its public finances in 1978.
Though the agency lowered its outlook to negative, it affirmed its “AAA” long-term and “A-1+” short-term sovereign credit ratings.
SP based its warning on a forecast that UK net government debt risked approaching 100 per cent of national income and staying at that level.
“A government debt burden of that level, if sustained, would in Standard Poor’s view be incompatible with a ‘AAA’ rating,” the agency said.
A loss of the top credit rating could raise the cost to the UK of financing its national debt, putting further strain on the country’s public finances and adding to pressure on British prime minister Gordon Brown’s administration to bring public borrowing down faster than it has planned.
The International Monetary Fund this week urged the UK to reduce its public deficit more rapidly once the economy was recovering from recession. SP’s move sets a precedent for other big economies with triple-A ratings whose debt burdens are also approaching 100 per cent of national income.
The UK debt burden is forecast over coming years to be similar to that of the US, France and Germany, all of which may now be vulnerable to an SP downgrade.
Sterling initially fell about three cents against the dollar to $1.5519, but then steadily pulled back to trade above $1.58 in late London trade, up 1½ cents on the day.
The 10-year gilt yield, which moves inversely to the price of the bond, rose as much as 14 basis points before ending the day seven basis points higher at 3.65 per cent. The cost to insure the UK government against default rose eight basis points to 80 basis points.
Opposition politicians seized on the possible downgrade, saying it proved Mr Brown had lost control of the public finances. Conservative finance spokesman George Osborne said: “It’s now clear that Britain’s economic reputation is on the line at the next general election.”
Economists, however, were more sanguine. Karen Ward at HSBC said: “The upside to this development is that it might impose some fiscal discipline and strengthen the political will to get the public finances back in order.”
National Treasury Management Agency chief executive Michael Somers warned last week that Ireland would be “lucky” to hold on to its sole remaining triple-A credit rating, as its low debt levels could surge to more than 100 per cent of gross domestic product next year, from about 41 per cent in 2008, after the State completed the transfer of the banks’ bad loans to the National Asset Management Agency.
Two credit rating agencies, SP and Fitch, cut Ireland’s credit rating last month.
Moody’s still gives Ireland a triple-A rating but has warned it may cut this by the end of next month due to concerns about the deterioration in the public finances and the State’s capacity to repair the banking sector
