The credit ratings agency Fitch has revised the United Kingdom's credit outlook from "stable" to "negative", indicating "a slightly greater than 50 per cent change of a downgrade over a two-year horizon." For the time being, however, they have reaffirmed the nation's credit rating at AAA, commenting that "on current policies the risk of a fiscal financing crisis is assessed to be negligible."
The agency writes that the revision reflects the limited ability of the UK's economy to absorb any further shocks as well as the possibility of a worse than predicted economic recovery. They attribute the weakened resilience of the nation to the nation's "elevated debt levels", and warn that an intensification of the Eurozone crisis could harm the government's ability to hit its debt reduction targets and bring the debt-to-GDP ratio downward by 2015.
Fitch report that the triggers which would likely prompt a downgrade from AAA status are:
- The government moving away from its austerity program resulting in debt peaking later and higher than currently predicted;
- Adverse economic shocks leading to higher levels of government borrowing and debt than currently projected; and
- Major downward revisions in the nation's projected growth.
The headline news looks like a blow for the government, but as with the downgrade by Moody's in February, the reasoning given by the agency supports the Chancellor's economic narrative. Indeed, Chief Secretary to the Treasury, Danny Alexander, told Reuters that:
This is a salutary reminder as to why Britain needs to deal with the enormous debts and deficit that we inherited, why we have got to stick to those plans.
And it should be a wake-up call to anyone who thinks we can afford as a country to loosen the purse strings. We can't afford to do that, and that is why there will be no unfunded giveaways in next week's budget.
Nonetheless, to be put on negative outlook by the second agency in as many months can only be spun so far by a Chancellor who has staked so much of his economic credibility on the opinions of rating agencies.
The downgrade will also raise questions about the extent to which the Chancellor's reported desire to introduce 100-year bonds is reflective of international confidence in the British economy, as opposed to the latest manifestation of a bond bubble, like Frazer Nelson suggested in the Spectator. If Britain is facing a negative outlook, then the saleability of century bonds seems scarcely related to the stability or not of the nation, instead having far more to do with the untrammeled demand for sovereign debt on the part of investors.