The 2013/03/07 at 08:04
Stéphanie Salti, in London
Britain’s loss of its triple A status, as ordained by Moody’s on 22 February this year, came as no surprise to the country. The credit rating agency justified its decision by weak mid-term growth prospects for the British economy – a situation not likely to improve before the end of the decade, according to the agency. The anticipated lowering of the country’s rating by one notch to AA1 is nevertheless a considerable setback in the eyes of the Chancellor of the Exchequer, George Osborne, who has made keeping Britain’s maximum rating one of the major challenges of his legislature and the reasoning behind its current economic policy.
Economists and analysts nevertheless concur that the United Kingdom’s economic situation is hardly better off than that of any Eurozone country. According to Jim Leaviss, Head of Retail Fixed Income at M&G, during a presentation to investors, “the UK AAA rating was not sustainable”. Britain’s debt currently comes to 88.7 % of its GDP, placing the country 8th amongst European countries; in Moody’s opinion, this figure may even climb to 96 % of the GDP in 2016. Meanwhile, its budgetary deficit comes to 6.2 %, in other words the highest after Italy, Spain and Greece.
The announcement of Britain’s new rating has been welcomed by some. “The good news is that Moody’s has downgraded the UK, and best of all, has done so ahead of the Budget in March,” comments Jim Leaviss. “Now George Osborne can do a bit of fiscal stimulus.” Today, the Cameron government makes debt elimination one of the major axes of its policy, based on a strategy of drastically reducing spending. However, the government, in power since spring 2010, has so far only achieved 30 % of all envisaged spending reductions, implying the extension of drastic spending cuts in other public sectors in coming years. This situation is perceived as extremely dangerous in Britain.
Jim Leaviss warns: “we are approaching our very own fiscal cliff in the UK in the next five years.” The BCC also expects a change in government policy, veering towards more radical support for the country’s businesses. “The Prime Minister and the Chancellor will have to look into more radical measures in the next six months, to stimulate exports, generate infrastructure development and create a business finance environment which favours enterprise and growth,” explains John Longworth, Director General of the British Chambers of Commerce. “We cannot simply hope for better times. Hope is not a strategy. So far, the implementation of growth measures by the government has been at the pace of coastal erosion. Urgent action is needed in the Budget next month to get the economy moving again, and any lacklustre performance will not be acceptable.”
Pending possible changes in government policy on 20 March when the Budget is presented, observers are evaluating the consequences of the downgrade: while the costs of loans should not increase significantly, going by the consequences observed in France and the United States following their respective downgrades, the depreciation of the pound sterling is likely to continue. The British currency, viewed as a safe value six months ago, plunged on the day following the announcement by 1 % compared with the dollar and 1.5 % compared with the euro. In 2008 and 2009, the British currency depreciated by 19 % compared with the dollar and 17 % compared with the euro.
According to analysts, Britain’s loss of its premium grade should trigger further depreciation this year.