The spectre of ratings agency decisions looms over the UK economy yet again, as S&P becomes the last of the three major agencies to move our triple-A grading to a ‘negative outlook’. The news wouldn’t be too worrying if rival agencies Fitch and Moody’s hadn’t already done the same in the first half of this year. S&P said that it might actually lower the credit rating at a later date ‘if fiscal performance weakens beyond our current expectations’.
What would be the consequences of a downgrade, then? Well, the top rating of AAA signals to investors and lenders that the government is competent enough to lend to, so a drop in that rating could mean an increase in the cost of borrowing – obviously not ideal. It is worth noting that it is a wind-up for ratings agencies to hold economies to ransom. If they'd spotted all that dodgy borrowing in the early noughties, we could have avoided the financial crisis altogether. They weren't so quick to dish out downgrades when times were good, were they?
Nonetheless, in response to S&P’s announcement, the Treasury said: ‘It is a hard road, but the economy is on the right track and just this week it was again confirmed that jobs are being created, with over one million new private sector jobs in the last two years.’ That’s suspiciously similar wording to George Osborne’s Autumn Statement last week.
Across the Channel however, France’s new Socialist president has managed to keep at least one ratings agency on side. Fitch has maintained the country’s triple AAA rating, even though Moody’s downgraded the country to Aa1 (the next step down) in November, and S&P cut it to ‘AA-minus’ in January this year. France only narrowly sidestepped a double-dip recession during Q3 this year, chalking up a measly 0.2% economic growth compared with Q2.
And while we’re on the continent, EU leaders have today revealed that they are in agreement on a deal for ‘integration’, which will stretch further than just the central banking regulator. The phases of this ‘integration’ are rather vague, but in principle, the ECB will become the chief regulator of financial services throughout the EU, and the new European Stability Mechanism will allow the EU to provide direct financial assistance to struggling banks. Still, these and other policies for the eurozone will take until at least mid-2014, if not later, to come into force, so it’s hardly a quick fix.
Nonetheless, Osborne will be keeping his fingers and toes crossed that S&P doesn’t follow up on its threat to downgrade the UK’s credit rating. In his Autumn Statement he reiterated that reducing the deficit is his first priority, and if there’s any significant rise to our borrowing rates next year it'll make things awkward for everyone.