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UK faces downgrade over debt levels

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UK faces downgrade over debt levels

Post  Panda on Sat 23 Mar - 9:28

UK faces Fitch downgrade over debt levels

Britain's credit rating faces another downgrade in the next month after
Fitch warned it is reviewing the country's "AAA" status in the wake of the

Last month, Moody's cut
Britain's rating on fears that the sluggish economic recovery will make it
harder for the government to repair the public finances Photo: ALAMY

By Richard Blackden

9:30PM GMT 22 Mar 2013


The agency warned that there is a "heightened probability of a downgrade" as
it conducts a review of the rating by the end of April.

The move prompted foreign-exchange traders to sell the pound in late trading
in the City and caps a torrid week for Chancellor George Osborne.

The pound fell sharply after the news before recovering slightly. Graph:

There has been some expectation that the credit rating would come under
renewed scrutiny after a Budget in which the official growth forecast for this
year was slashed from 1.2pc to 0.6pc.

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The feeble recovery is undermining the Government’s efforts to shrink
Britain’s debt pile, which, according to Budget projections, is now expected to
keep rising until 2017 rather than 2016 as first forecast.

The prospect of a downgrade by Fitch comes a month after Moody’s became the
first of the three major credit rating agencies to strip the UK of the coveted
AAA status.

Moody’s warned that the econ-omy’s sluggish performance was hampering efforts
to reduce debt that is now expected to peak at 85.6pc of the economy.

On Friday, Fitch voiced the same concern, claiming that the “persistently
weak performance of UK growth, in part due to European growth, has increased
uncertainty around the UK’s potential output gap.”

The Treasury said that the move by Fitch underlines that there are “no easy
answers to problems built up over many years”.

However, coming just days after Mr Osborne’s biggest economic statement of
the year, Fitch’s move will only intensify pressure on the Chancellor to find
new ways to reignite growth without borrowing more.

“The Government has been talking about reforms to help growth,” said Howard
Archer, an economist at IHS Global Insight. “But there’s one thing to talk about
it, doing it is another.”

The Government used the Budget to introduce a £130bn Help to Buy scheme,
which will see the taxpayer guarantee mortgages for some borrowers in an effort
to stir activity in the housing market and push up prices.

It is also trying to entice pension funds to invest in infrastructure
projects and also used the Budget to unveil tax relief that it hopes will
encourage companies to drill for shale gas.

Fitch said that Britain’s recovery has been hampered by headwinds from Europe
and, with the

Cypriot crisis erupting this week, it is not clear that Britain’s respite
from the crisis in recent months will last.

Although the pound lurched lower against the dollar in the final hour of
trading, the move by Fitch did not cause any panic in financial markets that
were firmly focused on Cyprus last night.

“The markets have long been expecting Fitch, and for that matter Standard
& Poor’s, to eventually follow Moody’s in taking away the AAA rating,” said
Mr Archer.

Britain’s borrowing costs remain close to record low levels and the yield on
the benchmark 10-year goverment bond closed at 1.85pc on Friday.

Although Moody’s cut the rating last month, seeing the UK stripped of the
highest rating for a second time will still be politically humbling for Mr

When he became Chancellor after the last general election, he insisted that
preserving the AAA rating would be a mark of the success of the Government’s
austerity effort.

Fitch added that the longer than average maturity of UK government bonds is a
factor running in the country’s favour.

The agency also pointed to the brighter picture in the jobs market.

However, having signalled the downgrade last night, economists said it would
be a big surprise if it did not follow through.




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