Fitch revises UK to negative outlook | FT Alphaville

Fitch revises UK to negative outlook

Century bonds, eh?’, etc. Fitch affirmed the UK’s current rating at AAA…

Fitch Ratings-London-14 March 2012: Fitch Ratings has affirmed the United Kingdom’s (UK) sovereign ratings as follows:

–Long-term foreign currency Issuer Default Rating (IDR) affirmed at ‘AAA’

–Long-term local currency IDR affirmed at ‘AAA’

–Country Ceiling affirmed at ‘AAA’

–Short-term foreign currency rating affirmed at ‘F1+’

The Outlooks on the Long-term IDRs have been revised to Negative from Stable.

The affirmation of the UK’s ‘AAA’ ratings reflects the progress made in reducing the government’s structural budget deficit and the credibility of the fiscal consolidation effort. The UK’s ‘AAA’ rating is underpinned by a high-income, diversified and flexible economy as well as political and social stability. The UK sovereign credit profile also benefits from the macroeconomic and financing flexibility that derives from independent monetary policy and sterling’s status as an international ‘reserve currency’. However, the government’s structural budget deficit is second in size only to the US (‘AAA’/Negative) and indebtedness is significantly above the ‘AAA’ median, although currently broadly in line with France (‘AAA’/Negative) and Germany (‘AAA’/Stable)…

The revision of the rating Outlook to Negative from Stable reflects the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery. In light of the considerable uncertainty around the economic and fiscal outlook, including the risks posed to economic recovery by ongoing financial tensions in the eurozone and against the backdrop of a still large structural budget deficit and high and rising government debt, the Negative Outlook indicates a slightly greater than 50% chance of a downgrade over a two-year horizon.

The triggers that would likely prompt a rating downgrade are as follows:

— Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast;

— Adverse shocks that implied higher levels of government borrowing and debt than currently projected; and

— A material downward revision of the assessment of the UK’s medium-term growth potential.

Related link:
A century of gilt – FT Alphaville