UK credit downgrade provokes call for change

LONDON: The man in charge in Britain’s economy says he won’t change direction despite a rating agency’s decision to downgrade the nation’s credit rating and he spurned renewed calls from the opposition for more stimulus for a flat-lining economy.
Treasury chief George Osborne declared that the action by Moody’s Investors Service redoubled his commitment to the government’s police of cutting spending in an effort to reduce deficits.
But Labour Party spokesman Ed Balls said the government should increase borrowing to give immediate stimulus to the economy.
Announcing the downgrade one notch from the top AAA to AA1, Moody’s said sluggish growth and rising debt were weakening the British economy’s medium-term outlook. Osborne had once boasted of the triple AAA rating as validating his policy, but he soft-pedaled its importance as a downgrade became increasingly likely.
Two other major rating agencies — Fitch and Standard & Poor’s — have Britain still at AAA but on negative watch. Howard Archer, chief European economist for IHS Global Insight, said the expectation of a downgrade “may actually mean that there is little negative economic impact from the move.”
“The negative impact for the UK is also likely to be limited by the fact that there are now very few countries left that have a AAA rating from all of the credit rating agencies,” Archer said.
Public sector borrowing remains stubbornly high, and is forecast by the government’s Office for Budget Responsibility to be around 120 billion pounds ($ 182 billion) for the year ending in April, little changed from the previous year.
The UK economy stagnated in 2012, with just one quarter of growth.
Osborne said in a statement that the downgrade was “a stark reminder of the debt problems facing our country,” with a debt accumulated over the years exacerbated by Europe’s economic crisis.
“We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs,” Osborne said.
Balls charged that Osborne was incapable of admitting a mistake.
“The plan has not worked,” Balls said. “I think the prime minister (David Cameron) is going to have to ask himself, ‘how do I get change in our economic policy for the good of the nation?’” Balls added.
Moody’s said weak prospects for British economic growth, which have thrown the government’s deficit reduction strategy off course, lay behind its decision to cut the rating by one notch to Aa1 from Aaa.
Austerity has been the watchword for Osborne’s fiscal policy since his Conservative-led coalition came to power in 2010 after an election in which he vowed to defend Britain’s triple-A rating, which can help keep down borrowing costs.
But a very slow recovery from the financial crisis has pushed back by at least two years the government’s goal of largely eliminating the budget deficit by 2015’s election.
The opposition Labour Party blames the deficit on too much austerity. Nonetheless, Osborne insisted now was not the time to change course. His annual budget due on March 20 is expected to show a further deterioration in the country’s fiscal outlook.
“Tonight we have a stark reminder of the debt problems facing our country and the clearest possible warning to anyone who thinks we can run away from dealing with those problems,” he said in a statement.
“Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.”
However, the downgrade may fuel unease amongst members of his own party and his Liberal Democrat coalition partners that Osborne’s gamble that he could slash the deficit and ensure a return to growth by the May 2015 election is failing to pay off.
Sterling fell by almost a cent to around $ 1.5160 after the downgrade, just off Thursday’s fresh 2-1/2-year low, and analysts expected it to weaken further on Monday, even if many had seen a downgrade coming sooner or later.
“It’s a pretty big deal,” said Kathy Lien, managing director at BK Asset Management in New York.
“We didn’t see a huge reaction in the pound because it’s late in the New York session. But you’ll see some more aggressive selling when the markets open (in Asia) on Sunday.”
Moody’s said the outlook on its rating on Britain was now stable, meaning any further change is unlikely for the next year or so.
Britain joins the US and France in having lost its triple-A rating from at least one major agency, after holding a top-notch rating from Moody’s and Standard & Poor’s since 1978, and from Fitch Ratings since 1994.
Moody’s said that despite considerable economic strengths, Britain’s growth was likely to be sluggish due to a mix of weaker global economic activity — especially in the euro zone — and a drag “from the ongoing domestic public and private-sector de-leveraging process.”
“This period of sluggish growth poses challenges to the government’s fiscal consolidation program, which we now assume will extend well into the next parliament,” Moody’s analyst Sarah Carlson said.
But Ed Balls, the Labour Party’s main spokesman on finance issues, said the Moody’s decision should be a wake-up call for Osborne ahead of his annual budget statement as Chancellor of the Exchequer.
“This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility.”
“The issue is no longer whether this Chancellor can admit his mistakes but whether the Prime Minister can now see that, with UK economic policy so badly downgraded in every sense, things have got to change.”
Howard Archer, chief UK economist at IHS Global Insight, said a new approach from Osborne was improbable.
“The strong likelihood is though that it will not materially lead to a change in his plans.”
Changes are more likely from the Bank of England, which surprised markets earlier this week after it revealed that Governor Mervyn King and two other policymakers favored restarting bond purchases to boost the economy.
They remained in the minority among their fellow policymakers but economists increasingly expect more stimulus eventually by the central bank.
This — and the central bank’s tolerance of above-target inflation — have combined to put pressure on sterling while leaving British government debt relatively shielded.
Charles Diebel, a fixed income strategist at British bank Lloyds, was sanguine about the impact of the downgrade on gilts, as US and French debt was not badly affected when these countries lost their triple-A ratings.
“This has been speculated as inevitable and is most likely largely in the market. I would expect only very limited damage to the gilt curve and to sterling. Historically, losing your AAA is actually a bond bullish event,” he said.