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UK suffers another ratings downgrade

Published: 23 Apr at 12 PM Tags: Euro Exchange Rate, Euro Crisis, UK,

Credit ratings agency Fitch became the second ratings agency in as many months to downgrade the long-term debt of the United Kingdom from its prized AAA status to AA+, albeit with a ‘stable’ outlook to it instead of its previous ‘negative’ outlook.

The analysts at Fitch point to the failure of the country to stabilise its general government gross debt (GGGD) below 100% and put it on a glide path down towards 90% of gross domestic product (GDP). Fitch now expect the UK’s GGGD peaking at 101% of GDP in 2015-16 (86% in the case of the public sector’s net debt) before it starts to gradually decline.

Of interest, Fitch adds that the slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions and/or tax increases if public debt is to be stabilised and reduced over the medium term.

It also forecasts that UK GDP in 2013 and 2014 will come in at 0.8% and 1.8% respectively, down from 1.5% and 2.0% in its last analysis.

Meanwhile, Bill Gross, the founder of the world’s largest bond fund Pacific Investment Management (Pimco) yesterday warned that the austerity measures implemented in the UK and Europe risk stifling the recovery.

Gross said that cutting debt rapidly coupled with severe austerity measures would not stimulate growth.

"The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not," Gross said in an interview with the Financial Times.

"You’ve got to spend money."

This comes hard on the heels of calls from the International Monetary Fund which has also been arguing that Germany, the US and the UK have been too quick to enforce strict austerity measures.

In a quiet news day, data out yesterday from the US housing market disappointed the markets with existing home sales showing a surprise decline in March.

The data, from the National Association of Realtors (NAR), showed that existing-home sales eased by 0.6% to a seasonally adjusted annual rate of 4.92 million units last month from a downwardly revised 4.95 million units recorded in February.

While this is still a 10.3% improvement from March 2012, the consensus forecast was for a slight rise to 5.0 million units.

Lawrence Yun, the Chief Economist of the NAR said “The good news is home construction is rising and low mortgage rates are continuing to keep affordability conditions at historically favourable levels. The bad news is that underwriting standards remain excessively tight, while renters are getting squeezed by higher rents."
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