UK's AAA credit rating in danger – S&P

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UK's AAA credit rating in danger – S&P
http://www.guardian.co.uk/business/2010 ... ng-warning

The credit ratings agency could cut the UK's rating following the election if the victor fails to substantially cut the budget deficit


Alistair Darling

Credit ratings agency Fitch said cuts announced by Alistair Darling in last week's budget were not big enough. Photograph: David Levene

Britain may lose its top notch credit rating unless the government formed after the election carries out drastic cuts to the country's deficit, Standard & Poor's warned.

"In the absence of a strong fiscal consolidation plan, the UK's net general government debt burden may approach a level incompatible with an 'AAA' rating," the credit ratings agency said in a statement.

S&P kept its negative outlook on the economy, but postponed a decision on a possible downgrade until after the election. Fitch, another rating agency, warned on a possible downgrade last week, saying that budget cuts announced by chancellor Alistair Darling last week were not big enough.

Credit agencies are expected to cut Britain's rating after the election unless decisive action is taken on the deficit.

"We expect to review the long-term rating and outlook again once medium-term fiscal policy becomes clearer following the 2010 parliamentary elections," S&P said.

The agency estimates government debt will rise to 77% of gross domestic product in 2010 and approach 100% by 2014 – more than double the 44% in 2007.

"Substantial uncertainty persists with regard to the details of what the current government has indicated will be a largely expenditure-focused fiscal consolidation programme starting next year," S&P said. "Additional spending measures will likely be required to put the public debt burden on a clear downward trajectory later in the current decade."

Investors have sold UK bonds since the budget last week, pushing the yield of the 10-year bond to 4%, from 3.91% last week.

Higher yields are seen as negative as they make the cost of borrowing money more expensive, and because they are used to benchmark long-term interest rates, such as mortgages. Britain's 10-year bond yields are above the 3.15% offered by the rock-solid German bunds, and the 3.93% offered by Italian debt.