Our headline is the same question you could have asked of Moody’s back in February…
The UK lost its second AAA rating on Friday night after Fitch cut its rating to AA+. The outlook’s stable. S&P is now the only one of the big three giving Britain a top rating. The rationale from Fitch:
- Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16 (equivalent to 86% of GDP for public sector net debt, PSND) and will only gradually decline from 2017-18. This compares with Fitch’s previous projection for GGGD peaking at 97% and declining from 2016-17 and the ‘AAA’ median of around 50%.
- Fitch previously commented that failure to stabilise debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the UK’s strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a ‘AAA’ rating.
- Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the UK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis. Fitch has revised down its forecast economic growth in 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% at the time of the last review of the UK’s sovereign ratings in September 2012. The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.
- Despite significant progress in reducing public sector net borrowing (PSNB from a peak of 11.2% of GDP (GBP159bn) in 2009-10, the budget deficit remains 7.4% of GDP (excluding the effect of the transfer of Royal Mail pensions) and is not expected to fall below 6% of GDP and GBP100bn until the end of the current parliament term. The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilised and reduced over the medium term…
Helping the rating were (among other things) receding risks from UK banks and the lengthy average maturity of gilts. Also, the currency point:
The international reserve currency status of sterling and the ability and willingness of the Bank of England to intervene in the UK government debt market largely eliminates the risk of a self-fulfilling fiscal financing crisis.
Fitch has previously laid out 90 per cent of GDP as a red line and it’s specific to how it sees the UK’s credit, including the agency’s sovereign ratings methodology. Fitch rates default risk not growth. Still, funny to see it pop up during a week when the Reinhoffian, effect-on-growth version of the 90 per cent figure bit the dust so very hard.
Anyway — reactions to downgrades of sovereigns who run their own currency have become slightly jaded of late. So, a multiple choice way to end this post.
Ultimately, the Fitch downgrade is
a) An embarrassment to a Chancellor who made such a political totem pole of the AAA ratings in the early years of the government
b) Neither an embarrassment nor likely to change policy in any way, this is the Chancellor we’re talking about
c) Really only going to be interesting to Westminster hacks at this point; it is utterly, completely, desperately clear how bad economic growth is looking to everyone else
d) Irrelevant to actual risk of default because of the UK’s independent currency, even if Fitch does acknowledge the existence of the latter.
e) All of the above
f) None of the above