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