Standard & Poor’s (S&P) has become the latest of the three main rating agencies to put the UK’s AAA rating on negative outlook. This is following Moody and Fitch’s decision to place the UK’s rating outlook to negative earlier in the year. S&P said it could lower the UK’s rating “if fiscal performance weakens beyond our current expectations”.
The AAA rating is the highest possible rating that can be given to a company or a country. S&P says that it only awards AAA when there is an “extremely strong capacity to meet financial commitments”. This top-of-the-table standard means an AAA rated borrower can usually secure a loan at lower interest rates since there is much less risk that the loan will not be repaid. However, the UK really does not seem to be a country in an economic situation able to fulfill such a promise. Thus, is it only fair if UK loses its AAA credit rating?
There are three factors that will affect the decision as to whether or not Britain should lose its AAA status; 1) future growth, 2) its ability to quickly reduce debt, and 3) that debt as a share of national income would not stall but decrease within the next 3-4 years. Current problems with the economy that could affect these factors include the possibility of stagflation, due to increased global food and energy prices, and the worsening Eurozone crisis. It is also expected that national debt, as a percentage of GDP, will continue to rise going into 2015 instead of stalling at 2014; two very contrasting situations.
The problem with stagflation is that prices are going up must faster than income. So many households are saving instead of spending which has created this situation of a weaker-than-predicted economic growth combined with high inflation over the 2% 12 month target. In terms of the Eurozone crisis, it returned into recession as of the 15th November this year due to an average contraction of 0.1%. This has very much increased the UK’s chances of going into a triple-dip recession; a scenario that seems almost inevitable.
A country’s credit rating can influence its borrowing costs because some investors are restricted from lending to borrowers that do not have a high rating but does this really matter? Clearly, the sum of which Britain are expected to borrow next year is quite extensive. However, compare the UK ‘s situation with other countries such as America, of whom lost their Standard and Poor’s AAA rating in August 2011 but it’s economy and money markets have not stalled, and France have also not been affected by their status change to AA, with their cost of funds yet to soar because of the time lag involved in these decisions. Although every country has a different economic situation, there is an argument to be made that a change in credit rating status will not have substantial short term damage.
In the final analysis, by the time rating agencies have acted, economic consequences have already passed and the rating change becomes pointless. So in effect it can be argued that Britain’s triple A credit status change would not have too much of an affect in the immediate future at least.
Contributed by Jordan Naidu