Creeping towards bankruptcy?May 21, 2009
From the Telegraph:
Britain has moved a step closer to losing its prized AAA rating after a leading ratings agency downgraded the country’s outlook because of the deteriorating state of the public finances and political uncertainty over how to repair them.
Ratings agency Standard & Poor’s lowered the outlook to negative from stable. A lower rating would mean that S&P believes Britain is no longer fit to be in the club of top creditworthy nations, undermining its critical ability to borrow cheaply on financial markets.
The interesting story underneath this not-unexpected announcement is that S&P don’t entirely trust the Tories, either, as their press release says:
We note that there is support across the political spectrum for
additional fiscal tightening. However, the parties’ intentions will likely
remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks…
The negative outlook reflects Standard & Poor’s view that, in light of
the challenges to strengthen the tax base and contain public expenditures, the U.K. government debt burden could approach 100% of GDP by 2013 and remain near that level thereafter.
“The rating could be lowered if we conclude that, following the election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term,” [S&P analyst] Mr Beers said.
In other words, at least part of the revision now is resulting from widespread uncertainty over Tories’ ability to impose tighter fiscal policy – that is, to cut public spending and raise taxes. It may be electorally prudent to stay schtum about just how unpleasant you will be in office, but Cameron and Osborne’s silence is doing them no favours in the financial markets.