Fitch Ratings on Friday stripped the UK of its cherished top “AAA” credit score, citing a weaker economic outlook that continues to hinder the country in keeping control of its debt.
Fitch is the second major ratings agency to downgrade its rating for the UK to “AA+.” Though Fitch said the country had fiscal financing flexibility helped by the strength of the pound, it warned of problems ahead due to higher-than-projected debt and deficits.
“The fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a ‘AAA’ rating,” Fitch said in a statement.
Britain’s government took the announcement in stride and declared that the rating was proof that the country could not walk away from its troubles. It took strength in the fact that Fitch gave the country a “stable” outlook.
“Though it is taking time, we are fixing this country’s economic problems,” the British Treasury said in a statement. “The deficit is down by a third, a million and a quarter new private-sector jobs have been created and the credibility we have earned means households and businesses are benefiting from near record low interest rates.”
The British government, which has long played on its “AAA” rating as a sign of its economic might, has been pursuing a harsh program of spending cuts and tax increases designed to reduce the nation’s hefty deficit, which Fitch put at 7.4 percent of the country’s economic output. The UK is the third-largest economy in the 27-member EU, after Germany and France, with a GDP of ￡1.4 trillion (US$2.13 trillion) last year. However, the economy’s growth has been flat-lining. Fitch estimated that the UK economy would not reach its 2007 level of real GDP until next year, underscoring the weakness of the recovery. This means that the UK economy cannot keep up with its ballooning deficit. Moody’s Investors Service, another rating agency, in February also stripped Britain of its “AAA” grade, but Standard & Poor’s held steady.
A downgrade theoretically means that it will cost Britain more to sell bonds and finance its debt. That would mean the government would have to spend more money on debt servicing, exacerbating its budget problems. Because a rating agency thinks it is riskier to lend Britain money, investors would normally demand a higher return to buy UK bonds. However, markets may have already calculated in those factors when Moody’s downgraded the UK earlier this year.