14 Mar 2012

Bad news for Osborne as Britain is put on negative outlook

As I leave the office, yet more bad news.  Really the worst possible present for a Chancellor just days before an important Budget: a second ratings agency has effectively lowered their assessment of Britain’s creditworthiness. (I use the term lowered cautiously, the AAA rating hasn’t been lowered, it’s been affirmed for now, but it’s now on negative outlook, which is a “worse” credit rating given that George Osborne called the reverse move “improved”*)

There is a 50 per cent chance of a downgrade over the next two years says Fitch. The French-headquartered rating agency has basically kept Britain in the Premier League (alongside France, also on negative outlook), but we are now out of the Champions’ League comprising Germany and others.


Again, for all the ratings agency flaws, and there are many, both the chancellor and the PM chose this metric as a totem of their economic strategy. When this is going in the wrong direction at the same time as unemployment is rising, inflation above target, and the economy still officially contracting, this is more than an embarrassment.

Not even Gordon Brown faced two of the big three ratings agencies putting Britain on negative outlook. Particularly on the day that political journalists in Washington are briefed on a new 100 year or everlasting super-bond gilt.

The Treasury’s official response is here: “A week from the Budget, this is a reminder of why it is essential Britain sticks to its plans to deal with its debts. As Fitch itself says, the reason we are keeping our AAA rating is because of ‘the progress made in reducing the government’s structural budget deficit and the credibility of the fiscal consolidation effort.”

They are also clear that a downgrade would follow any “discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast”. This is a just another warning to anyone who believes there can be deficit financed giveaways in next week’s Budget.

I would say this. We are really only retaining this AAA rating because the Bank of England is a captive market for our gilts, and because a recent British Chancellor oversaw a remarkable lengthening of the average maturity of Britain’s debt from 9.7 years to 14.5. And Fitch and Moody’s both say that in their verdicts on Britain’s fiscal sustainability. This is all about growth. Will the Budget deliver?

* Page 5, the Chancellor’s Autumn Statement Speech (in November), he uses the fact that S&P took Britain off negative outlook, to say Britains “credit rating improved”

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