Economists positive about UK's triple-A status
UK has 27.5 percent chance of losing rating, poll suggests
By CFOWorld.co.uk | CFO UK | Published 09:59, 15 February 12
Economists believe the UK's triple-A rating could survive the threat of a downgrade because of the government's resolve the budget deficit, a poll revealed on Wednesday.
Moody's imposed a negative outlook on the UK, along with France and Austria, as well as downgrading six European countries. The ratings agency said the country's finances were too weak to cope with another big shock. The negative outlook was the first such warning for the UK since the eurozone debt crisis.
A downgrade of debt would make the UK a less attractive option for investors at a time when the economy needs extra investment.
But economists are confident that the UK will retain its triple-A status. A Reuters poll of ten economists gave a median 27.5 percent chance the UK will lose its rating.
The recovery from the steep slump in 2008/2009 has been weak. Unemployment - already at a 17-year high - is set to rise further, and Bank of England governor Mervyn King has warned the way back to growth would be long and arduous.
But the government is still enjoying near record-low borrowing costs. The reason is that investors still view its bonds as a relative safe haven in the global debt storm despite a deficit worse than that of France, which saw its AAA-rating downgraded by Standard & Poor's at the end of last year.
The chancellor is aiming for a budget deficit of 8.4 percent of national economic output in the 2011/12 fiscal year, falling to 7.6 percent in 2012/13, still much higher than those forecast for France or the United States.
Leading fiscal policy think-tank IFS assumed in its euro break-up risk scenario a drop of gross domestic product by 2.3 percent in 2012, which would send the government deficit back to nearly 10 percent. However, the IFS still saw the debt-GDP ratio still falling by 2017 even in this case.
"The impact of the remaining cuts to the services provided is difficult to predict; they are of a scale that has not been delivered in the UK since at least the Second World War," the IFS said in its annual analysis of the public finances.
Moody's itself noted the Bank of England's key role in safeguarding investors' trust as well as the limited risk of not finding buyers for its debt.
"The UK has the lowest refinancing risk of all the large AAA economies, based on the average maturity of the UK's debt stock, ... its large domestic investor base, and the willingness and ability of its central bank to undertake accommodative monetary policy," Moody's said.
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