January 29, 2013 8:40 pm

Rating agencies come under attack

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Boris Johnson’s chief economic adviser has hit out at the credibility of rating agencies as he backed the London mayor’s proposals to boost investment in the capital’s infrastructure.

Mr Johnson last week challenged the government to “junk talk of austerity” and launch a new programme of infrastructure investment. Asked if this might threaten the UK’s credit rating, Gerard Lyons said: “I don’t think Britain should lose its triple-A status and, if we do, in my view it should raise more questions about the credit rating agencies’ analysis than it does about the UK economy.”

Mr Lyons told the Financial Times in an interview that while the UK needed a “credible fiscal strategy in the medium term”, markets were to some extent “moving from rewarding austerity to rewarding growth”.

The mayor believes investment in projects such as Crossrail 2 and new Thames crossings, could be achieved without posing any threat to the UK’s ability to borrow.

But even if there were a downgrade, Mr Lyons said this would be far from disastrous. “If you look at France and the USA, both have lost their triple-A status and it doesn’t seem to have adversely affected them,” he said, adding that the rating agencies were “not the barometer of truth people seemed to think they were”.

Mr Lyons accompanied Mr Johnson to the Davos World Economic Forum last week as the mayor sold the virtues of London to international investors, politicians and businesses.

The veteran City figure – a former chief economist with Standard Chartered bank who took up his part-time role at City Hall in January – said London was in a prime position to benefit from the trade opportunities offered by emerging economies.

“I don’t think people in the West get it at all. The pace and scale of change in the world economy is just phenomenal. And London is still at the centre of this emerging world,” he said.

Mr Lyons highlighted London’s role in the UK economy, with recent figures showing it was responsible for 22 per cent of national gross value added. With the southeast at 15 per cent, the two regions account for more than one-third of UK economic output. “What’s good for London is good for the rest of the country,” he said.

However, he thinks London’s powers do not match its economic heft. The London Finance Commission, an independent body set up by Mr Johnson to explore whether the city could take greater control of taxation, capital and revenues – without taking resources from other UK regions – is set to report in April.

While he did not want to prejudge its findings, Mr Lyons said that London compared poorly with other world cities in its ability to raise funds for infrastructure projects, including borrowing on the international capital markets. “It’s absolutely ridiculous how little fiscal autonomy the cities of the UK have,” he said.

Asked if David Cameron’s pledge on a referendum over Europe would threaten London’s status as an international financial centre, he said there was “every likelihood” of a yes vote following renegotiation. But even if Britain ended up withdrawing from the EU, he expected the City to retain its clout as a trading hub.

“Already the sunk costs – the amount of investment that’s already taken place here both from the continent as well as by international banks – would suggest London is continuing to stay ahead of the competition,” he said.

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