The Staggers

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Why the UK can afford to lose its AAA rating

A credit downgrade would have little effect on the ability of the UK to borrow.

By George Eaton Published 15 February 2012 10:06

Despite Moody's decision to place the UK's credit rating on negative outlook, the bond markets remain unmoved (see graph). The yield on ten-year UK gilts ended the day flat at 2.1 per cent. In other words, although its coveted AAA rating is now at risk, the UK is having to pay no more to borrow than before.

How to explain this apparent paradox? George Osborne would like you to think that it's due to his deficit reduction programme but the UK's low yields have more to do with monetary activism than fiscal conservatism. With its own currency and its own independent central bank, the UK can afford to keep buying up its own debt through the Bank of England's £350bn quantitative easing programme. As City AM editor Allister Heath notes in his column this morning, the UK "can never technically default. It can just print money in extremis." So long as the Bank continues to buy more gilts than the government issues, bond yields will remain at record lows.

As in the case of France and the United States, were the UK to lose its AAA rating, it would likely see no rise in its borrowing costs. For this reason, although a downgrade would be politically disastrous for Osborne, it would not be the economic calamity that some imagine. If the Chancellor had any sense, he would have taken advantage of the UK's low interest-rates long ago and borrowed to stimulate growth. As the Nobel Prize-winning economist Christopher Pissarides argued in our "Plan B" issue last October, "a small rise in gilt interest rates is a small price to pay for more jobs". Or as Tory MP David Ruffley said of a temporary VAT cut:

Even if we can't find the money for tax cuts from public spending savings, we could add it to the deficit and it is not going to send the markets into a tizzy, I don't think anyone really believes that. The markets will not go haywire if there was a modest loosening in borrowing in the short run if it was for the right reason.

Rather than appeasing the discredited rating agencies with yet more austerity, Osborne should finally devise a plan for growth.

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Tags: George Osborne

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12 comments

Thu, 2012-02-16 13:02 — Andrew Mcmillan (not verified)

Great article - fantastic read i must say. However i tend to disagree that Britain can afford to lose its triple A rating. Britain is currently seen as a safe haven for investment in the current Eurozone crisis - crucial to growth prospects. losing the rating would hamper this.

Wed, 2012-02-15 10:43 — Indu Pendent (not verified)

@george

Why sacrafice the AAA unnecessarily?

Plan B (employing more people in the public sector in non-wealth creating jobs at above market salaries and paying them generous pensions) would create more debt. We saw from QE1 that stimulus leaks out of the UK through imports very quickly - the UK has a low fiscal multiplier as a result.

So Plan B means more debt, more deficit and AA-. It might win Labour votes and power.

Rather than being on the back foot chasing the coalition's economic polices and having to keep doing u turns, why dont Ed Ball and Miliband get behind a national investment bank and slow money businesses rather than Gordon's borrow & spend and his crusade against SMEs?

Wed, 2012-02-15 11:51 — Robert Taggart

Indeed, UKGBNI can afford to lose this. But, what UKGBNI cannot afford be another term of hard Liebore government !

Wed, 2012-02-15 12:06 — Safe to Ignore the Troll (not verified)

-Indu Pendent

How's that 16 hour day working out? Either your job requires you to comment seemingly endlessly on comment threads on the New Statesman website or, you're full of it. Judging by the drivel that you consistently peddle, I know which is the more likely.

Wed, 2012-02-15 15:12 — Eddy S (not verified)

i think once the short term issues are addressed and the recovery picks up we need to address a more serious long term issue and that is running a budget surplus when the economy starts to grow at trend and keeping more ammunition when times are bad - that is the most important lesson we can learn (i.e. you cannot defeat the economic cycle - however politicians will try and buy votes and run deficits). we need to install a long term credible framework everything else is just talk!

Wed, 2012-02-15 15:16 — Eddy S (not verified)

one other thing differentiate between 2 types of govt spend. admin style pen pusher jobs are bad for structural economy and deficit and infrastructure spend such as high speed rail, airports, high speed broadband, energy generation projects are good for long term growth.

learn this simple principle and re-balance and we can do wonders for the long term health of economy.

Wed, 2012-02-15 16:25 — ang (not verified)

If it's politically disasterous for Osborne, then it's worth losing, just to see the lying toad's face, when he tries to wriggle out of it.

Sun, 2012-03-04 09:32 — Luddite (not verified)

"A credit downgrade would have little effect on the ability of the UK to borrow" What is it about the lefts obsession with borrowing? Why don't we try living within our means: now that would make a refreshing change?

Wed, 2012-02-15 16:57 — Awake!

'As City AM editor Allister Heath notes in his column this morning, the UK "can never technically default. It can just print money in extremis." So long as the Bank continues to buy more gilts than the government issues, bond yields will remain at record lows'
City AM!!!!!! I've heard it all now. These guys post closing overnight prices... when there's been a bank holiday !!HAHAAHAHAHAHAAHAHA
How can u honestly print thIS GARBAGE?
'the UK "can never technically default. It can just print money in extremis." So long as the Bank continues to buy more gilts than the government issues, bond yields will remain at record lows.'
JUST ANOTHER APRT OF THE APPARATUS I SEE...

Wed, 2012-02-15 17:14 — Awake!

At Eaton
eddy S and Indu make some very decent points.
Safe to ignore the troll is against them i think... difficult cos he's texting from the pub probably having cashed his mums giro. He's kind of with you. Does that ring even the smallest bell?
Eddy S - yes, FORCE govts to never buy votes again...

Sun, 2012-02-19 13:03 — Steve Lockett (not verified)

Guys, even The Torygraph has a better article on the subject than this. Who gives a folk what S&P or Moody's think. Look at what happened when they downgraded the Yanks, the square root of folk all. If you want to know why I was reading the Torygraph, may I quote my late father; 'so I know what the b@stards are thinking".