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December 6, 2012 8:22 pm
The UK’s prized triple-A credit rating could be set for the chop next year, as the big rating agencies reassess its finances after the Autumn Statement on Wednesday.
The chancellor’s report on Wednesday contained downbeat forecasts for economic growth and budget deficits for the next five years, which will make it impossible for the UK to start chipping away at its debt pile by 2015-2016 as it had hoped.
That will force credit rating agencies to strip the UK of its top triple-A grade rating, bond investors and economists forecast.
“The Autumn Statement makes it pretty likely that the triple-A rating will be a thing of the past come the end of next year,” said Phillip Apel, head of interest rate strategy at Henderson Global Investors.
Credit ratings may not carry the weight they did before the financial crisis, but the top notch triple-A grade rating still has symbolic value for countries and their lenders.
Fitch Ratings was the first of the three big agencies to respond to the Autumn Statement, forecasting that public debt would peak at 97 per cent of economic output by 2015-2016. It noted the government’s unwillingness to impose additional austerity to try to meet its self-imposed debt reduction target.
“In our view, missing the target weakens the credibility of the UK’s fiscal framework, which is one of the factors supporting the rating,” the agency said in a statement.
Both Fitch and Moody’s put the UK’s rating on a negative outlook this year. Standard & Poor’s had taken a more favourable view of the UK’s finances – affirming its triple-A rating this summer – but cautioned that disappointing growth could lead it to change its mind.
Many investors argue that the UK’s rating is long overdue for a downgrade, given the immense fiscal challenges the country faces.
“We’ve been surprised that the UK hasn’t been downgraded already,” noted Nicholas Gartside, chief investment officer for international fixed income at JPMorgan Asset Management.
Nonetheless, investors emphasised that a demotion of the UK’s rating was unlikely to derail the government bond market.
Despite the threat of downgrades hanging over gilts for most of the year, the UK’s benchmark borrowing costs this summer fell to their lowest since at least 1703, when records were first compiled.
Bond yields have edged higher since then, but are still extraordinarily subdued. The benchmark 10-year yield has dipped since the Autumn Statement, to 1.74 per cent late on Thursday.
Bond fund managers point out that the US and France have also lost their pristine triple-A ratings recently, and saw borrowing costs decline nonetheless. Japan was downgraded to a mere A+ by Fitch this year, four notches below triple-A, but its 10-year bond yield has stayed firmly below 1 per cent since then.
If the UK’s gilt yields were to climb markedly higher as a result of a downgrade, the Bank of England could always restart its “quantitative easing” bond-buying programme and subdue borrowing costs again.
“It’s not the end of the world to lose the triple-A,” says Jim Leaviss, head of retail fixed interest at M&G Investments. “Unless we have a growth miracle, the UK will probably be downgraded – but there aren’t many large triple-A countries left anyway.”
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