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Government under fire for threat to AAA credit rating

Published 22/05/2009

The Government’s stewardship of the economy was under fresh fire after warnings that the UK could face a humiliating loss of its premium credit rating for the first time in more than 30 years.

Ratings agency Standard & Poor’s (S&P) said national debt could rise to 100% of output by 2013, leading to the UK losing its coveted ‘AAA’ status.

It is the first time the nation’s AAA-rating has come under threat since S&P began assessing the UK’s sovereign debt in 1978.

Shadow Chancellor George |Osborne renewed calls for a general election and said the Government was “putting our economic stability at risk”.

“It’s now clear that Britain’s economic reputation is on the line,” he said.

Liberal Democrat spokesman Vince Cable added: “Until the Government comes clean about how it intends to pay back its debt, it is perfectly possible that we will see a further deterioration in Britain’s rating.”

S&P is holding its rating for now, but lowered its outlook to “negative” due to worries over how long it could take to repair the fast-deteriorating public |finances. The warning came as official figures showed net borrowing surging to a worse-than-expected £8.5bn in April — more than four times higher than last year — as tax receipts dive and spending rises in recession.

Chancellor Alistair Darling expects to borrow a record £175bn this year, with debt as a share of GDP peaking at 79% in 2013/14.

But a lower credit rating would mean the cost of that borrowing will rise, as investors demand a higher return on the riskier debt. Ireland and Spain have already lost their AAA-status this year.

When S&P last looked at its ratings in January, it assumed UK debts would rise from about 49% of GDP in 2008 to 83% in 2013.

But analyst David Beers said: “Our outlook revision on the UK reflects that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term.” The country’s net debt currently stands at £754 bn. This is already equivalent to 53.2% of the UK’s output, the highest for more than 30 years.

S&P has downgraded 101 of 174 sovereign credit ratings given a “negative” outlook since 1989. Across all its corporate and country ratings, around one in three “negatives” lead to a move lower.

Mr Beers said a downgrade could follow the election next year if it judges plans to salvage the public finances are not robust enough to “put the UK debt burden on a secure downward trajectory”. But he added the outlook could be shifted back from negative to stable if “comprehensive measures” were taken to address the issues. A Treasury spokesman said S&P had held the AAA-rating due to the UK’s “wealthy, diversified economy”, a “high degree of fiscal and monetary flexibility” and “relatively flexible product and labour markets. The Budget set out a clear plan to halve the deficit within five years. That judgment was based on a deliberately cautious view of the public finances,” he added.

The Government will be issuing a record level of gilts — Government-guaranteed bonds — this year to fund its borrowing. The comments from S&P failed to derail the largest ever gilt auction which took place yesterday morning. The Treasury’s debt management office received £13bn in bids for £5bn worth of five-year gilts. But IHS Global Insight economist Howard Archer said S&P’s move was “always a serious risk”.

“It is a very firm prod to which ever party forms the next government that they must take early strong, sustainable action to rein in the public finances,” he added.

Belfast Telegraph

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