Fitch puts UK on 'negative outlook'

Fitch has warned that the UK's AAA could get a downgrade. It's the second thumbs down from a ratings agency in as many months.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013
As warnings go, this is less a wrist-slapping, more a gentle brush with a feather duster. Fitch has in fact affirmed the UK’s AAA rating, but the outlook has been moved from ‘stable’ to ‘negative’. That means there’s more than a 50% chance of a downgrade within two years if our economy declines.

The timing could be better, of course. The pressure is already on government with the Budget announcement next week. The small business community is clamouring for more tax breaks and financial support. The public sector is demanding more resources. And now, Fitch is wagging its finger at the Chancellor reminding him that any debt increase could threaten our ability to borrow at fantastically low levels. ‘The forthcoming Budget is expected to reaffirm the government's commitment to deficit reduction,’ says Fitch, pointedly. It’s the proverbial rock and hard place.

Let’s take a closer look at Fitch’s statement. First, the good news: ‘The affirmation of the UK's 'AAA' ratings reflects the progress made in reducing the government's structural budget deficit and the credibility of the fiscal consolidation effort. The UK also benefits from independent monetary policy and sterling's status as an international 'reserve currency'.’ So we’ve toed the line in or austerity measures and sterling has stayed strong. That’s all well and good.

Now for the constructive criticism: ‘The projected peak for government indebtedness is at the limit of the level consistent with the UK retaining its 'AAA' status. The easing of financial market tensions in the eurozone in recent months has diminished the risks to the UK, but in Fitch's opinion, the crisis is not resolved and could once more intensify.’

In translation, the UK must stabilise it’s borrowing so that what we owe does not exceed 94% GDP by 2014/5.  This is not beyond the realms of possibility. The Office for Budget Responsibility has stated that debt levels by 2015 should peak at 78% of gross domestic product. Well under the crisis level set by Fitch. And tensions in the eurozone have already begun to ease. The deal with Greece has been signed off. And, in a sure sign of economic optimism, German Bunds fell to their lowest levels this morning as the markets flogged their safe haven investments to take a punt on riskier assets – like Spain’s bonds, for example, which have been very well received.

Fitch’s decision is unlikely to shake the markets good humour – Moody’s announcement in February certainly didn’t. But the Chancellor is going to have to tread very carefully with his Budget next week. Or face a right Fitch up.

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