Standard & Poor’s has kept the government on notice that it is still reviewing Britain’s creditworthiness after the Bank of England downgraded its forecasts for the country’s economic growth.
The ratings agency pointed out that its own forecast for growth between 2010 and 2012 was 1.8% – considerably more pessimistic than Threadneedle Street’s prediction of 3%.
Britain has a coveted AAA rating, which George Osborne wants to cling on to because it keeps the country’s interest payments as low as possible.
S&P spelt out that Britain was not out of the woods. “As we have said previously, we will continue to review the rating in light of further information over the coming months about the extent of the expenditure-led fiscal consolidation,” the agency said. S&P had first warned the chancellor last month that his budget might not be enough to maintain the AAA rating.
The rating is such a crucial indicator of the price Britain pays to borrow on the bond markets that rating agencies have received some of the blame for the severity of Osborne’s austerity package.
The experience of Greece is often used as an example. The Greek government was furious when the agencies downgraded its debt to junk in April, when the eurozone was plunged into a sovereign debt crisis. After the downgrade, the austerity measures that Greece embarked on led to industrial action and civil unrest.
Such panic was the backdrop for Osborne’s June emergency budget. Economists agree the agencies could be blamed for the austerity package presented by Osborne, but there were other pressures on him. Alan Clarke, UK economist at BNP Paribas, said the markets themselves needed to hear tough talk from the chancellor. “The austerity measures were necessary to avoid a downgrade. But if the austerity measures had not been delivered the markets would have gone mad.”
Vicky Redwood, senior UK economist at Capital Economics, agreed. “It’s the markets more generally than the ratings agencies,” she said.
If Osborne had not chosen severity, economists reckon there could have been two results – both extreme. David Page, economist at Investec, explained: If George Osborne had not addressed the fiscal situation you could have seen market confidence erode, as we did with Greece, leaving the economy in financial ruin.” Or the opposite result could have been that Britain might have “got away with it”.
Clarke said that Britain’s borrowing cost could have risen sharply if the markets had not reacted positively to the budget. The government pays a rate of interest of about three-quarters of a percent to borrow money for two years. Greece pays 20%. “If it had got even half way to where Greece is, money would have gone on interest payments that could have been used to pay for nurses or schools.”
The price of government bonds has not collapsed – and hence the government’s interest payments have not soared. Is that a sign that the market thinks Osborne has taken the correct approach? Redwood said: “It means the markets think he’s doing the right thing in that he will bring government borrowing under control. It’s a different thing if he’s doing the right thing for the economic recovery.”
Similar Posts:
- Davos 2011: George Osborne offers deal to stop banker bashing
- BOE warns UK Recovery Slower than Forecast
- Credit rating agency Fitch sacked by Portuguese Banco Espírito Santo
- Budget needs to encourage small business growth, FSB says
- Franco-German axis: Joint push for Euro dominance?
