Britain's debt outlook lowered to negative
LONDON -- Britain faces the unsettling possibility of seeing its debt rating downgraded, after credit ratings firm Standard & Poor's said Thursday it has revised the country's outlook to negative from stable.
Though the ratings agency reaffirmed the country's actual long-term credit rating at "AAA" and its short-term rating at "A-1+," it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.
The outlook revision does not trigger a formal re-evaluation of Britain's rating — unlike being put on credit watch — but does mean that policymakers have to be aware that a downgrade may happen if public finances do not improve.
The pound slumped by more than 2 U.S. cents to just below $1.56 after the news, but recovered some ground to trade around $1.5670. Meanwhile the FTSE share index fell more than 120 points, or around 2.7%, though like other markets around the world it was facing heavy selling pressure after the U.S. Federal Reserve warned that the U.S. economy would shrink more than anticipated this year.
A lower credit rating would make the government pay higher interest rates to borrow money on bond markets. An S&P study found that 37% of its negative outlooks were followed by a downgrade.
"Pressure on the rating will raise concerns regarding the ability to issue the record amount of gilts (British government bonds) required over the coming year to fund the deteriorating fiscal position in the U.K.," said Hans Redeker, an analyst at BNP Paribas.
This is the first time Britain has been put on the negative list since S&P started giving its view of the outlook of the country's public finances in the early 1980s.
S&P said the downward revision reflects a more cautious view of how quickly the country's finances can be repaired and that its projections incorporate new estimates of the cost of the government's bailout of the banking sector. It now estimates that the government's net debt burden will rise to nearly 100% of economic output by 2013, way more than the government is currently projecting.
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