UPDATE 3-S&P cuts UK's outlook to negative on debt fearsFont size: A | A | A7:25 AM ET 5/21/09 | Reuters
* S&P cuts UK outlook, says debt could near 100 pct of GDP
* S&P says 1 in 3 chance that UK rating will be downgraded
* Britain says committed to sustainable public finances
* Moody's, Fitch says UK outlook stable
By Sumeet Desai and Keith Weir
LONDON, May 21 (Reuters) - Credit ratings agency Standard & Poor's cut its outlook on Britain to negative on Thursday for the first time, saying government debt could near 100 percent of GDP and citing uncertainty before a national election due by mid-2010.
The agency affirmed Britain's 'AAA' long-term and 'A-1+' short-term sovereign credit ratings. However, its analysts said there was a one in three chance that the UK would be downgraded.
The pound tumbled 3 U.S. cents, the gilt future fell more than a point and the FTSE-100 stock index was around 2 percent lower after the announcement -- the first time Britain had been on a negative outlook since S&P introduced them in the 1980s.
Britain has had a "AAA" rating since 1978. Rival credit rating agencies Moody's and Fitch said they saw no reason to change the UK's status and reaffirmed its ratings.
The country is battling its deepest recession since World War Two and centre-left Labour Prime Minister Gordon Brown seemingly faces defeat in a general election he must call within a year.
"We have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term," Standard & Poor's credit analyst David Beers said. [ID:nLL292085]
He said S&P had a more cautious view than the government of "how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow".
Britain's finance ministry noted uncertainty in the economic outlook meant S&P could revise back its negative outlook and that last month's budget had set out a path to cut a deficit forecast to hit 175 billion pounds ($276 billion) this year.
"The Budget set out a clear plan to halve the deficit in five years. That judgement was based on a deliberately cautious view of the public finances," the Treasury said.
TAX HIKES, SPENDING CUTS
Analysts said S&P had heaped further pressure on the next government to rein in public debt.
"Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day -- but today's announcement by S&P puts that much more pressure on the next government to act quickly," Colin Ellis of Daiwa Securities said.
Confederation of British Industry President Martin Broughton accused Brown of "economic vandalism" over plans to raise the top rate of income tax to 50 percent.
"The use of heroic growth assumptions together with a timetable extended to 2018 amounted to a serious failure to address the deficit in a way that gives confidence to buyers of our debt," he said on Wednesday at a dinner attended by Brown.
Official data released shortly after the S&P announcement showed British public borrowing hit a record high for the month of April -- the first month of the new tax year -- as the recession-hit economy battered public finances. [ID:nONS004245]
In his April budget, finance minister Alistair Darling said public debt would spiral -- with a record 220 billion pounds of gilt issuance this year.
Britain had little difficulty finding buyers at a record 5 billion pound gilt sale on Thursday.
S&P said Britain's ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility and relatively flexible product and labour markets. But the looming election was creating uncertainty about government policy.
"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," Beers said.
"Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate." (editing by David Stamp) |
