There has been some discussion recently of the UK losing its AAA credit rating.
As things stand, the United Kingdom is one of a small number of countries which have retained their AAA rating since the beginning of the financial crisis. A credit rating, when applied to a country, works in much the same as one applied to an individual. A number of credit rating agencies, most notably Standard & Poor’s, Moody’s or Fitch Ratings, evaluate the likelihood of a country defaulting on its debt by looking at their borrowing levels, growth and spending.
The UK’s poor economic performance has led several economists to forecast that the UK will lose its status as one of a handful of countries that retain the much-coveted AAA credit rating. Investors have considered the UK a safe haven, which has allowed it to enjoy low borrowing rates. The fear in the Treasury is that the loss of the AAA rating would push up borrowing costs and make the UK’s debt payments more expensive.
George Osborne received a warning from David Riley, the head of global sovereign ratings at Fitch, that Britain could be stripped of its prized AAA status if he fails to boost the country’s economic situation in the spring budget
Mr Riley made it quite clear that the UK remains under “significant pressure” following the autumn statement in December, when George Osborne conceded that growth would be lower over the next two years and for that reason he was likely to miss one of his two debt reduction targets.
While he stressed that a downgrade was not a “decided event”, he said Britain remained “vulnerable” to fresh economic “shocks” elsewhere in the world.
Speaking on BBC Radio 4, he said:
“There is increasing concern that the fiscal consolidation is happening more slowly, that the economy isn’t recovering as quickly as we had hoped. This does leave the UK quite vulnerable either to a worsening of the situation in Europe or some kind of shock coming from the United States or elsewhere. It does mean that its AAA rating is under quite significant pressure.”
So unless Osborne can show significant debt reduction, Britain will be on course for a debt level at 100% of GDP according to Fitch, and that, in their words ‘is not really consistent with the UK retaining the AAA rating.’
Losing a AAA is not necessarily the end of the world; both the US and France have been downgraded by other ratings agencies without any discernable effect on their borrowing costs. The point is that, the dramatic and painful cuts that the coalition government have been inflicting on the UK have all been in the name of reducing our debt and rebuilding our economy. Well it’s clear now that the plan isn’t working; things are getting worse, and there doesn’t seem to be a Plan B.