UK credit rating under threat as debt hits £8.5bn
In an embarrassing blow to Alistair Darling that handed political ammunition to the Conservatives, Standard & Poor’s said that it was revising its outlook for Britain’s coveted “triple A” debt rating to “negative” from “stable”.
S&P left the triple A credit rating, a gold-plated standard that is the highest available, intact for now. But its warning shot, the first such move for three decades, stoked nervousness over the Government’s drastic plunge into the red as a result of the recession and banking crisis.
Shares plummeted as anxiety over Britain’s public debt mountain rippled through markets. The FTSE 100 index fell almost 3 per cent, closing down 122.9 points at 4,345.5. The pound fell heavily in morning trade but recovered some poise to close up on the day. In the gilts market, government bonds also sustained a battering, driving yields on the benchmark 10-year gilt up by as much as 0.09 per cent.
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Worries over the rapid worsening of the public finances multiplied as official data showed that the Treasury borrowed £8.5 billion last month. This was a record for any April, and more than four times the £1.8 billion figure for the same month last year.
In last month’s Budget, the Chancellor unveiled a leap in planned borrowing to £178 billion for 2009-10, equal to to 12.4 per cent of GDP. Borrowing is being driven to postwar records as the recession undermines tax revenues and surging unemployment sends benefit payments soaring. The government’s books are also taking a heavy hit from the multi-billion cost of bank bailouts, although the ultimate cost remains highly uncertain.
S&P fuelled fears over the situation as it warned that it would downgrade Britain’s rating if it “concluded that the next Government’s fiscal consolidation plans are unlikely to put the debt burden on a secure downward trajectory over the medium term”.
Any such downgrade would be a heavy blow to Britain’s financial standing. It would force the Treasury to pay higher interest bills on future borrowing to compensate those who buy its bonds for running greater risks.
However, calculations by Colin Ellis, of Daiwa Securities, suggest that, in a hypothetical example, the extra interest cost on this year’s planned £220 billion in newly issued gilts would amount to less than £600 million had such a downgrade already occured.
Despite that modest cost, even the threat of a downgrade after the next election will inflame concern that the Government will face higher interest bills to finance the burgeoning deficit.
S&P’s decision ratcheted up pressure for the Chancellor, and the next Government, to rein in runaway borrowing through further, draconian spending curbs and big tax increases.
The agency said that its move was motivated by concern that public debt could reach 100 per cent of GDP, from 55 per cent now, and remain stuck there. “A government debt burden of that level, if sustained, would in S&P’s view be incompatible with a AAA rating,” it warned.
S&P said that it had amended its assessment of UK public finances to take a more cautious view of how quickly revenues could revive, and how quickly ministers could curb spending. It also said that the eventual bill for the banking bailout will be between £100 billion and £145 billion, against a £50 billion Treasury figure.
S&P said that it still believed that Britain’s creditworthiness would stay supported by its “wealthy, diversified economy, a high degree of fiscal and monetary policy flexibility; and its relatively flexible product and labour markets”. However, it said that it was worried over the political will of a future Government to curb spending.
It said that it would reaffirm the triple A rating, with a stable outlook, only 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”.
Can we still trust those credit rating agencies, i mean, they were the ones who, quite recently, were rating “subprime mortgage backed” securities as triple A. …?
Bill, London, UK
That was to be expected and I did say so several times. And despite all those noises about green shoots and we have bottomed out, I do not see it. I see only that things get worse. Printing money is one of the deadly sins, and together with the huge debts this is an explosive cocktail. Seatbelts on.
Pietzsch, Cambridge, UK
Britain operates a DEBT BASED (fiat) MONETARY SYSTEM.
NO DEBT in the UK, MEANS ‘NO’ MONEY INTHE UK.
The interest rate is at 0.5% to get people to take on MORE DEBT, this NOT working.
The ONLY option left is to print money out of THIN AIR.
RUN AWAY ‘INFLATION’ = NO MORE AAA RATING.
Andrew, Skipton, England
This government is addicted to spending money it doesn’t have on things the country doesn’t need. More databases anyone?
Paul, Coventry,
This should be today’s headline. It is the day that Britain is Broke. We need massive public sector cuts today not in 12 -18 months time. Over a quarter of the UK workforce work in the public sector. Whilst it is true that they provide support they produce no income. This is not sustainable.
Rupert, London, UK
More evidence that Alistair Darling’s new super tax is a politically motivated gimmick that will only harm the public finances and condemn the UK to a massive tax burden for generations to come.
Not now, Darling!
A Jones, London, UK
£8.5 billion? That’s small change to Labour.
Peter, london,
All this in the week when we’re told the ressession will be over by xmas. This Government has mortgaged our future and refuses to acknoweledge the truth.
It looks like the “chaos” that Gordon feared is on its way without the need an election.
Come on Gordon do the decent thing.
Andy M, Wrexham, Wales
Britain cannot borrow their way out of the recession. An “emergency” austerity budget is now necessary, cutting public spending and increasing taxes.
paul, dublin, ireland
The budget was cautious?
Is that the same as saying Brown is prudent?
Bill, Knaresborough, North Yorkshire