Duncan’s Economic Blog

UK Downgrade?

Posted in Uncategorized by duncanseconomicblog on May 21, 2009

S&P, the ratings agency, has placed the UK’s AAA bond rating on ‘negative outlook’. This means they are ‘considering’ downgrading it in the future.

 In the context of the large expected rise in public sector debt, this is not surprising.

 The full S&P statement is here.

 First off – let’s not panic.

 They are talking about moving us, at some point in the future, to AA, the second highest rating. They are not saying we are heading for bankruptcy/the IMF whatever. Let’s keep some perspective.

 Second at 10.30am this morning (after the negative outlook), there was bond auction. We sold £4.5bn of 5 year gilts at an average interest rate of only 2.91%. Clearly the markets are not as paniced as the right is about to suggest they are. We received £13bn of bids, in other words there were plenty of people willing to lend to us.

 Third, it’s worth reading the actual S&P release (my emphasis):

 We note that there is support across the political spectrum for additional fiscal tightening. However, the parties’ intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.


   “The rating could be lowered if we conclude that, following the election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term,” Mr. Beers said. “Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate.”

 This downgrade, if it happens, will not happen until after the election. At that point it will be imperative for the government to set out a credible plan to return the finances to balance, I favour doing it mainly through tax rises, the Tories through mainly spending cuts. Either way, the new Government will be forced to act very quickly in setting out plans.

 I am not trying to ignore the significance of all this.  But let’s keep some perspective.


5 Responses

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  1. CharlieMcMenamin said, on May 21, 2009 at 1:06 pm

    Duncan, I’m not going to question your economic judgment on the significance of this. You do sound a little on the Corporal Jones side ( ‘Don’t Panic”!) to my untutored ear, but I know you are far better informed than I on these matters.

    But I do think the politics of it are very far-reaching indeed. It may well mean the Tories can run a election campaign openly calling for massive slashing of state spending. It certainly adds to the chances of an implosion of this current govt…

  2. VinoS said, on May 21, 2009 at 5:48 pm

    Also, why should we trust the ratings agencies? Didn’t they completely fail over evaluating CDOs, MBSs etc during the house-price boom?

  3. snowflake5 said, on May 21, 2009 at 11:25 pm

    A substantial part of the debt on the govt’s books is actually liabilities from Northern Rock, Bradford and Bingley, LLoyds/Hbos and RBS – and this debt is not serviced by the taxpaper but from income generated by the banks’ assets.

    Once those firms are privatised the debt will disappear. I think the Treasury are planning to sell Northern Rock at the end of this year to get their debt off the books. No doubt if Lloyds or RBS shares recover that debt will disappear from the govt’s books too.

  4. VinoS said, on May 21, 2009 at 11:32 pm

    It would be a bad idea to sell off the banks too quickly. The state would not be able to get a good price for them in current market conditions.

    If the gov’t ever does want to privatise the banks it owns or part-owns [and i wouldn’t be keen on that] then at least it should wait until the next boom and the share prices are v.high.

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