Just how safe is the UK’s AAA rating?
I ask because if I worked for a Ratings Agency I would currently be going through the OBR’s new forecasts and asking myself again and again, how long can I continue to give this country the top rating?
Consider the facts. The OBR has rather helpfully (in Box 4.4) provided some international comparisons of the UK’s debt and deficit position. As they note:
Relative to the main European countries, the UK deficit remains high in 2013. The UK’s Treaty debt levels are now close to the euro area average.
As can be seen our deficit compares unfavourably with France, Italy and Spain whilst our debt, although better than either Italy, is higher than Spain’s and very similar to France.
Our growth doesn’t compare too well either. The latest EC forecasts have the UK growing at 0.6% in 2012 and 1.5% in 2012 not very different from France at 0.6% and 1.4% (the OBR forecasts are higher).
Furthermore the fact that austerity is now due to stretch into another Parliament reintroduces what a ratings analyst what call ‘political risk’.
The straight forward thing is that whilst the markets and press and gripped with speculation about France losing its triple A the UK has a higher deficit, similar debt and similar growth.
The economy will grow by just 0.7% next year, and by 2.1% the year after. Even these figures look too sanguine
However, the deterioration in the economic and fiscal outlook implies that
net public sector debt will peak at 78% of GDP compared to the previous OBR
forecast of 70% in 2014-15. On a broader measure of government debt used by
Fitch in international comparisons, the UK government will become the most
indebted of any ‘AAA’-rated sovereign with the exception of the US
(‘AAA’/Negative Outlook). UK government debt is on this measure projected by
the OBR to peak at 94% of GDP and compares with Fitch projections for Germany
and France of 83% and 92% respectively.
As with some other major ‘AAA’-rated sovereigns, unless off-setting measures
were adopted, the capacity of UK public finances to absorb adverse economic and
financial shocks that would result in yet higher public debt while retaining
its ‘AAA’ status has largely been exhausted.
The problem isn’t that the government hasn’t been ruthless enough in cutting – it’s simply that the economy isn’t growing. And as the case of Italy demonstrates low growth can be as much of a problem as high deficits for bond investors.
Could it be the case that the great economic surprise of 2012 is the UK being placed back on negative outlook?