Coffee House

S&P puts George Osborne a step closer to losing the AAA rating

13 December 2012

9:48 PM

13 December 2012

9:48 PM

Standard & Poor’s has delivered its verdict on George Osborne’s mini-Budget. It has reduced its outlook to negative, as per Citi’s predictions (which I blogged about last week). Citi said the S&P thumbs-down would happen in the new year: it took days. S&P now thinks there’s at least a 33pc chance that the UK will lose its AAA rating. Little wonder, given that UK debt is rising faster than any country in Europe.

S&P says the UK could lose its coveted AAA status…

“in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation.”

I suspect this refers to what James Forsyth refers to as Osborne’s St Augustine approach to deficit reduction: Lord, give me fiscal discipline. But not yet.

The below graph shows each of Osborne’s budgets/statements, and the pink shows the proportion of fiscal pain being delayed until after the next election. So now, the majority of fiscal consolidation is to be done by whoever wins the next election:-


S&P is not any more impressed with this than Citi was. Every time Osborne stands up to give a forecast, the economic recovery drifts further away. The below shows projections for GDP, rebased to 100. It shows a trend that worries a credit rating agency: the UK recovery is now two years adrift of the recovery promised two years ago:-

So what’s next in Britain’s journey to downgrade-ville? I’ll return to the prediction from Michael Saunders of Citi:-

S&P will put the UK on “negative outlook” in H1-2013, with Moody’s putting the UK on “negative watch” (indeed, this may be implicit in their statement that they will “assess” the UK’s rating in early 2013). Risks of a ratings downgrade could fall if the economy recovers strongly (improving the fiscal numbers), electoral uncertainties fade, or the Chancellor announces a new and credible medium-term fiscal framework that gains broad political support.

Many investors currently seem to assume that the loss of the UK’s AAA rating would not, by itself, be a major problem for markets. However, a ratings downgrade would be a major blow for the government and hence, by adding to risks that the coalition parties do badly in the 2015 election, it would increase uncertainty over the implementation of fiscal austerity in the runup to the 2015 election and beyond it — and such uncertainties probably would be bad for sterling assets in our view.

hat tip: Clarissa Tan


Subscribe to The Spectator today for a quality of argument not found in any other publication. Get more Spectator for less – just £12 for 12 issues.

Show comments
  • foxoles

    Cheap energy will get us our AAA rating back, if it goes.

    Get fracking.

    Nb – you won’t see this on the BBC:

    500 German authorities raid Deutsche Bank re allegation of dodgy CO2 scam:

  • Procrustes

    Sadly, many years of tacitly encouraging increases in personal debt by the previous governemnt(about the only aspect of our lives they did not have an opinion or a law to about) I believe the economy is only part of the issue. Future disposable income was effectively borrowed and spent in the hedonistic period between 2003-2007. It’s now squeezed by a raft of pressures and the easy remortgage/borrow your way out of trouble options are no longer there to mask the awful state of personal finances.
    Yes,facing up to the truth is unpleasant but needs to happen.However,government are addicted to credit and have not yet faced the facts. The Opposition seem even further away from reality. Both need to wake up because all we are watching is a slow dance in a burning room at the moment.

    • TomTom

      The housing boom was deliberately by Greenspan and Brown to prop up US and UK banks after the Boom Crash which exposed bank balance sheets. They DELIBERATELY gave banks an easy money source through CMO sales and low interest rates to encourage housing to rescue the economies. In 2005 the US housing market peaked and smart operators were bailing out.

    • 2trueblue

      Re mortgaging and credit card borrowing, as you say is still there to be paid back and did make a lot of people feel rich, until the market fell. unfortunately those at the upper age limits have no way of working their way out of the debt and this is an added problem that goes unmentioned. The perception that their house will pay off the debts is still the general belief, and why governments are desperate for the housing market to be revived to its high levels. Until that is faced we will not get out of it.

  • HooksLaw

    You have a chip on your shoulder Mr Nelson and sadly you do not have as much political or economic nouse as you would like to pretend. I seem to remember the IMF Article 12 2012 Consultation suggesting, ‘demand support is needed’.
    It also said…
    ‘Budget neutral reallocations should be undertaken to make room to increase
    government spending on items with higher multipliers (e.g., public investment).’

    This is exactly what the government has done.

    The IMF also said of course…
    ‘The planned pace of structural fiscal tightening will need to slow if the recovery
    fails to take off even after additional monetary stimulus and strong credit easing
    measures. The UK has the fiscal space to make such adjustments’

    You are making it up as you go along Mr Nelson.

    France is $42 billion short of reaching its target of cutting its deficit to 3% of GDP and its economy is in recession. Frances debt to GDP is heading towards 90%.(the ONS say ours in October was 67%). S&P say ‘We expect the UK’s net general government debt as a percentage of GDP to continue to rise in 2015, before declining again’

    I wonder if French debt includes the debts of its healthcare budget (the IMF calls France’s health care debt ‘fast rising’). France is failing to act on its pension problems; we are. We are raising the retirement age, France has riots when this is mentioned. Factor all that into debt funding .
    THE OECD are saying Italy’s recession is going to be deeper. Its (supposedly) financially sound PM has just resigned and Berlusconi is after a comeback.
    These are 2 of Europe’s largest economies!

    After inheriting a nightmare economy the govt are walking a tightrope to cut its expenditure and also prop up living standards. Its not helped by a collapse in the Eurozone.
    Its showing itself to be responsible and compassionate. The vast amount of debt it inherited is not going to go away overnight no matter how many graphs you draw.

    At a time of europe wide economic downturn you want the government to cut another 20 billion from somewhere in the expectation that it will boost the economy? I judge from your propaganda, Mr Nelson, that you want a return to the easy certainties of a Labour .government.

    • TomTom

      Osborne has cut capital spending. Besides George aka Hook’s Law, you know that the IMF is a weird group especially if you have friends working there, you know it is not very good at forecasting or prescription now that the French own it. The simple fact is that you have put the economy on a trend flatlining path for the future and there is no way you can get off this – it will cause real pain in areas outside London and Tatton and not everyone will make tax fre gains on selling houses – most will be distressed sellers

  • Jim Hollett

    At the end of the day our banks are still bankrupt, their corruption is becoming increasingly apparent – LIBOR, money laundering, etc. George Osborne seems to think we need these beasts and he continues to give them all our money, like the previous Labour government. This is likely to destroy us pretty soon, the rating agencies will downgrade us to some low level after we are ruined.

    • TomTom

      Deutsche Bank was raided yesterday for Tax Evasion and Fraud over Carbon Credits trading….

      • the viceroy’s gin

        …and (only) three unnamed Londonistan banksters were arrested over the LIBOR scandal the other day.

        Not a word about this from the Speccie teenagers, I notice.

  • 2trueblue

    Remind us, how well did S&P and the other rating agencies do in the years running up to the global financial crash? Has their model and methodology of measuring how it all impacts on us changed, and is it any better. They got it so wrong globally why should we rate them as competent at all?

    • Duke of Earl

      That is irrelevant. After all only a select view of Austrian economists saw this crisis coming.
      Just because the rating agencies screwed up before doesn’t mean they will make the same mistake again (at least any time soon).

      • 2trueblue

        Totally meaningless. They were not up to the job, and the fact that they all followed each other, and still do, shows what? What evidence do you have that they are on the right track now? The whole world went on a spending binge on money that they did not have, no one had the balls to say ‘this can’t be right’ and the very people who were supposed to know did not and it is irrelevant?

        • Duke of Earl

          My point is that EVERYONE in the world was in a mania. It happens a number of times each century and is usually followed by a huge bang. It’s also very very hard to spot.
          One thing that it consistent though is that the mistakes are often not repeated. It’s usually something else that blows up.
          This is what capitalism is about. People make mistakes and they learn from them. Unless you’re gvernment of course.

          • 2trueblue

            The cycle is supposed to be every 50yrs or so, and yes, the blow up is not repeated in the same areas, but the result is the same.

        • TomTom

          They are on an even bigger spending binge now using QE. The BIS has warned that asset prices are inflated as in 2007. Hong Kong Monetary Authority and Oz Central Bank fear another 2007-2008 Crash

          • the viceroy’s gin

            Worse yet, the US has issued a recent report that the FHA is issuing low quality home loans again, and has been since 2009. I guess they never stopped.

          • 2trueblue

            Interesting that Hong Kong Monetary Authority are predicting another crash, considering that Hong Kong and China are in the midst of their own property boom.
            The idea that you have to spend to get out of it does not work but is the accepted route, unless you get the spend on things that have value. In the 13yrs of Liebores reign we had little of value added to the infrastructure so are less well placed to ride out the storm.

    • TomTom

      So what ? It is simply a rating agency with assessments of bonds for purchasers – it has nothing to do with you and since the Bank of England buys all the Gilts with taxpayer funds it has no meaning. The Bank has trebled the money supply in 3 years – it could simply increase it another 10000% and buy all the IOUs the Government issues until the exchange rate collapses and hyperinflation takes off. I am trying to recall David Cameron in 2005 becoming Tory leader warning of economic collapse or Osborne asking for more bank regulation

  • HooksLaw

    So its not too much too soon then?
    So this fatuous ‘double dip’ was not caused by coalition policy then?

  • Daniel Maris

    Don’t fuss Fraser. The Triple A rating was only considered vital to Britain’s national economic interest last year, when Osborne thought it coincided with his own interest in becoming the next Tory PM .

    • HooksLaw

      So you have nothing sensible to say then you clueless gimboid? What a surprise.

      ‘Germany’s coveted AAA credit rating slashed to ‘negative’ as eurozone debt crisis continues’
      ‘A similar move was announced for the Netherlands and Luxembourg
      All three could potentially have to stump up cash to bail out Spain and Italy’

      With everyday that goes by the probability of Germany becoming responsible for Europe’s debs comes ever closer.

      • TomTom

        Osborne and Cameron URGE Germany to carry EuroZone debts so their frends in hedge funds and The City get a taxpayer guarantee for their bond portfolios

        • HooksLaw

          ‘friends in hedge funds’… pathetic.

        • the viceroy’s gin


          If the eurozone blows up, the Londonistan banksters are in deep trouble.

  • Dimoto

    “Electoral uncertainties fade” eh ?

    So, Mr Nelson, you want Osborne to pour on the austerity (killing any nascent recovery stone dead), and “increasing electoral uncertainties”, or you want Osborne to slash taxes (which the LibDem’s won’t wear), and which would ensure a downgrade or two, or you basically want Balls as Chancellor and a mighty financial crisis with our French friends at the IMF in charge (you know, the fragrant Lagarde and that Blanchard fellow – the “economist” who declared, less than a month before Lehman, that the world economy was going swimmingly ?)

    Carping criticism is easy isn’t it, do you actually have a point of view ?

  • TomTom

    Maybe it is because people are being squeezed by tax increases and rising cost of living with no relief in sight. Osborne has created the worst possible situation of pain without gain and simply dragged matters through the sludge – 0.9% growth since 2010 hurts many people but not apparently his circle of friends. It seems the status quo is attractive for people like Osborne.

  • toco10

    A rather defeatist and demented piece if I may say so Fraser.Are you seriously suggesting more and more debt and Third World interest rates as Labour and its leader the son of a Marxist advocate?Given the cards Osborne was dealt by the dysfunctional and erratic Gordon Brown and his now disgraced Labour Misgovernment he was boxed in regarding options to remove us from Labour’s financial dustbin.

    • TomTom

      No he was not. He did not have to kill off growth with tax rises. He was far too smug. Rescuing the Banks created a deep depression – Osborne did not change policy – he continued QE and that is destroying the economic system by mis-allocating investment and skewing everything towards the Banks which borrow at ridiculously low rates and starve the economy of credit. Osborne has maintained Labour policies with extra tax increases

      • HooksLaw

        Who says growth was killed off by tax rises? Thats your invention.

        Labour encouraged people to spend now and bugger tomorrow with a temporary VAT cut. Indeed we has lots of temporary ‘prop up the Labour party’ policies to take us to the 2010 election. How long did you want that to last?

        • TomTom

          I have this notion that when government wants to tax alcohol it claims it will cut demand, so as an economist I naturally assume tax increases reduce disposable income hence spending.

          • HooksLaw

            Are you saying that the governments own spending has no effect. Tax is a transfer of spending from us to the state. The alternative to the tax rise was a bigger cut in spending.
            Personally I do not favour the tax rise but the level,of spending was unsupportable otherwise. Does a rise of 2.5% in VAT really send the country into recession – what with interest rates at 0.5%?

            Governments tax alcohol because it knows we are suckers for drink.

      • Duke of Earl

        I think I’ve just fallen in love! You’ve summed it up perfectly.
        Osborne was dealt a terrible hand, but he’s done nothing of substance since. You don’t cut the state by trimming budgets, you do it by fundamentaly roe shaping the way it works.
        That means closing whole departments, scrapping whole entitlements, stopping certain services and essentially changing the game!
        Change people’s expectations of what the state should do and watch the deficit disappear.
        It’s amazing that even in the crisis that we are in now, the NHS budget is still rising!
        Only Canada and Sweden have ever done this in the west and they are in fantastic shape. Ireland is trying it after a huge recession and they are recovering faster than we are.
        Osborne was never going to beat Brown (Balls) at his game. You need to change the entire calculus.

        • HooksLaw

          Minority governments do this do they?

          • Duke of Earl

            Usually not. Which is why the Tories should not have formed a coalition and should have called another election.

    • George_Arseborne

      Oh to be a fanatic makes one sheepish. Toco10 is a living example. Osborne is even borrowing more than Gordon Brown. His most priced triple A rating is fading away. I wonder what the Economy litany will be when this go awy. He was first abandoned by the OECD, later IMF and now the stupid rating agents that let Moron lije Osborne to binge borrowing. Get real man

      • dalai guevara

        Yes, I particularly loved the fact that the Queen herself had to tour the vaults to prove to the outside world that there still was some bullion.

        • the viceroy’s gin

          Don’t tell me you’re one of those gullible fools who believes that’s still the queen?

          Elizabeth disappeared along with the bullion, years ago.

          I know because I read about it on a cool site called “golly adilemma”, where they’re hip to useful info like that, sprinkled about, hither and yon.