Duncan’s Economic Blog

Worrying News for Osborne from Moodys and Fitch

Posted in Uncategorized by duncanseconomicblog on March 24, 2011

Whilst the media seem focussed on the welcome news of WPP’s return to the UK, the credit ratings agency Moodys has this morning fired a warning shot across Osborne’s bows.

Reacting to the news that growth has been revised down and debt revised up the agency has stated that: 

we believe that slower growth combined with weaker-than-expected fiscal consolidation could cause the UK’s debt metrics to deteriorate to a point that would be inconsistent with a AAA rating

No imminent chance of a downgrade yet but certainly worrying news. Moodys’ own forecast for UK GDP growth in 2011 is 1.6%, marginally below that of the OBR.

Ratings agency Fitch has also warned on the UK’s outlook:

David Riley, head of sovereign ratings at Fitch, said yesterday’s Budget measures were fiscally neutral, after chancellor George Osborne re-affirmed the government’s previous deficit reduction plans.

He said: “If the economic recovery proves weaker than projected, future Budgets may require additional measures to ensure that the government meets it ambitious fiscal targets.”

Back in May 2009, when S&P (the third major agency) warned that Britain could potentially lose its AAA rating Osborne commented that is was “now clear that Britain’s economic reputation is on the line”.

It looks like our reputation is ‘on the line’ again.


20 Responses

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  1. Liam Murray said, on March 24, 2011 at 12:08 pm

    Hang on, they can’t be ‘bond vigilantes’ we should ignore when they react to decisions by one government and then prescient sages of the public finances when they react to decisions from another…?

    If I recall back in May ’09 you urged ‘perspective’ on that S&P ‘negative outlook’ and pointed out the downgrade would only follow an election and the absence of a credible plan. Post that election the downgrade hasn’t happened and the outlook is ‘stable’ again. That ‘perspective’ is still needed.

    • duncanseconomicblog said, on March 24, 2011 at 12:13 pm

      I certainly did. I even went on CNBC and said the same:


      But the point is Osborne didn’t.

      And I never gave a Mais lecture in which I said:

      “So we will maintain Britain’s AAA credit rating.”


      “Those who say we should simply ignore the markets are siren voices, luring us onto the rocks.

      For an economic policy maker to rail against the unpredictable nature of financial markets is like a farmer complaining about the weather.”


      • Liam Murray said, on March 24, 2011 at 12:22 pm

        Not sure I follow. I’ve never swallowed Osborne’s market asbolutism and have long argued that they’ve overdone the ‘we have no choice’ angle. I’m centre-right and prefer a smaller state and think they should’ve been more open & honest about an ideological preference for that – that’s the old ‘political’ vs ‘economic’ trope we’ve discussed many times.

        My point here is you’ve urged caution & suspicion previously with regard to sovereign ratings and consistency demands you do the same here. Pointing out that Osborne himself hasn’t been consistent is hardly news (or argument); he’s a politician after all, of course he’s inconsistent & selective. That’s doesn’t excuse any of us doing the same….

        • duncanseconomicblog said, on March 24, 2011 at 12:26 pm

          To be clear – I’m simply pointing out that by one of his own key tests (reassuring the markets), Osborne is failing.

          • Liam Murray said, on March 24, 2011 at 12:32 pm

            Fair enough but it’s a test you previously dismissed. If the charge is Osborne makes capital from these things when it suits and ignores them when it doesn’t it then the charge holds true for you too.

    • Mike said, on March 24, 2011 at 5:47 pm

      Duncan’s comments are perfectly valid.

      The argument was that the UK rating will only be downgraded if the UK is likely to default, which wasn’t likely to happen. (Necessary measures taken.) But Osborne, in opposition, did everything he could to precipitate a sterling run and a bond market crisis for electoral advantage. In government, Osborne claimed to have saved the UK’s rating. Now, Osborne is being menaced by the same political bogeymen he created.

      Also worth mentioning that the growth and increased tax revenue over the past year were all down to Labour’s policies.

  2. gastro george said, on March 24, 2011 at 12:47 pm

    Remind me what happened when the ratings agencies lowered Japan’s rating below that of Botswana’s?

  3. Dave Holden said, on March 24, 2011 at 12:59 pm

    But Japan largely funds it’s debt internally – so far..

    My view is too much debt has left us between a rock and a hard place – if we cut and short to medium term “debt metrics” get stressed, if we don’t cut short to medium term “debt metrics” get stressed.

    • BenM said, on March 24, 2011 at 4:47 pm

      “But Japan largely funds it’s debt internally – so far..”

      Is this not true for the UK too?

      70pc of our national debt is internal.

  4. Dave Holden said, on March 24, 2011 at 1:01 pm

    ^ sorry should read

    “if we cut – short to medium term “debt metrics” get stressed, if we don’t cut – short to medium term “debt metrics” get stressed.”

  5. gastro george said, on March 24, 2011 at 1:06 pm

    This may seem facile, but remind me why we need to sell bonds anyway?

  6. Dave Holden said, on March 24, 2011 at 3:39 pm

    “This may seem facile, but remind me why we need to sell bonds anyway?”

    I don’t think there are any facile questions when it comes to banking – even the experts argue over the basics – I’m still trying to get my head around fractional reserve banking (mish has a good post on this today http://globaleconomicanalysis.blogspot.com/2011/03/central-bank-authorized-fraud.html)

    Basically my *very* layperson understanding is it’s to fund spending over and above that allowed by taxation.

    But I’m very open to be corrected on that.

  7. gastro george said, on March 24, 2011 at 3:48 pm

    My question was, of course, rhetorical.

    Are bonds and “cash” not both “promissory notes”. So selling bonds denominated in sterling is just exchanging one slightly less liquid note that bears interest for one fully liquid note that doesn’t bear interest. You’re just swapping asset classes.

    There may be other reasons to sell bonds, but not to “finance the government”, which can finance itself perfectly well without bonds.

    That’s why the prospect of a default is vanishingly remote, and the views of the ratings agencies are of marginal importance.

  8. Dave Holden said, on March 24, 2011 at 3:56 pm

    “My question was, of course, rhetorical.”

    My mistake.

    As the the rest – are you talking about MMT?

  9. gastro george said, on March 24, 2011 at 5:59 pm

    Yes indeed.

  10. Dave Holden said, on March 24, 2011 at 6:16 pm

    Ah, well given the purely theoretical nature of MMT (are there any real world examples?) then I’m not sure how “rhetorical” your question was 🙂

    My adventures in Chartalism have only just begun and I can see why from a particular political perspective it’s very seductive (in the same way Keynesianism is) but I have to say having just finished Mosler’s book I remain unconvinced. I’m about to start of Wray’s.

    On the particular issue of bonds the interest bearing nature of them I see as a good thing – it brings investor discipline to the table.

  11. gastro george said, on March 24, 2011 at 6:44 pm

    My adventures are also new. It depends what you mean by real world examples. MMTers are represented in academia, and publish their own analyses the same as any other theoreticians. If you mean economies being run on MMT lines, well not in the neo-liberal consensus economies, of course. And since the 80s the political classes of those economies have been intellectually captured by neo-liberalism. It’s hard to find a decent dialog between neo-liberals and MMTers as their premises seem to be so fundamentally different …

    MMT, IIRC, is politically neutral. There are those that adhere to it that use it to justify low taxation and a small state. But most, as you suggest, are left inclined because of the theoretical refutation of the importance of deficits.

    I said that there might be other reasons to sell bonds and, as you suggest, one of those could be to use them to bring in investor discipline.

    What I’d be interested to read, if anybody has some links, is an attempt to justify the importance of deficits given that we have a fiat currency – and I’m not talking about the “Zimbabwe!!!” trope. Why should deficits matter as long as they reflect the output of the country – which removes the tendency to inflation?

  12. […] thought as we try to cut our public spending and drive growth. Moody’s then compunded this, putting a chill on the UK with a warning that slow growth and our high debt risk our precious AAA debt rating. It’s not […]

  13. […] measures being imposed across Europe, and in the UK they continue to peddle their untruths, just last week warning Osborne not to let off on his fiscal squeeze or risk a downgrading, seemingly oblivious to the fact that Osborne’s medicine is not […]

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