S&P May Downgrade the UK

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Standard & Poor’s has become the latest credit rating agency to give the UK government a scare, by downgrading the outlook on Britain’s triple A rating to negative. Fellow agencies Moody’s and Fitch both revised the UK to negative outlook earlier this year.

S&P said “The outlook revision reflects our view that we could lower the ratings on the UK within the next two years if fiscal performance weakens beyond our current expectations. We expect economic growth to rise slowly in the medium term, with net general government debt as a percentage of GDP continuing to rise in 2015, instead of stabilising in 2014 as previously expected”. The UK, Germany and Canada are the only major economies to currently have an AAA rating from S&P.

S&P’s announcement came after chancellor George Osborne was forced to announce in last week’s Autumn Statement that economic growth has been far weaker than he had hoped. Ministers, including chief secretary to the Treasury Danny Alexander, have played down the significance of a ratings cut in recent days. Government insiders have also been buoyed by the fact that both the US and France have lost their AAA ratings in the past two years, without seeing their borrowing costs rocket.

With all three large credit rating agencies giving Britain’s triple A status a negative outlook, many analysts think it is only a matter of time before one pulls the trigger and downgrades UK debt. A country’s credit rating can influence its borrowing costs, as some investors are restricted from lending to borrowers that do not have a high rating. BNP Paribas economist David Tinsley said “2013 looks like being a year when the UK could lose its AAA rating fairly comprehensively”. Philip Booth, professor at Cass Business School told ADVFN Financial News “The potential downgrading won’t have a major impact in economic terms, but the government would ideally like to retain an AAA rating”.

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