Monday, October 8, 2012

Is the UK the next AAA nation to be downgraded?

As George Osborne proudly talks about cutting £10bn from the welfare budget (see video), the reality is setting in that UK's £120bn deficit target is likely to be breached and debt to GDP ratio will reach well over 90% (from under 70% today) in the next few years. The double-dip recession (discussed here) that reduces tax receipts has been the key culprit.
Fitch: - ... weaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK's "AAA" rating, which has been on Negative Outlook since March 2012. With a structural budget deficit second in size within the "AAA" category only to the US ("AAA"/Negative), and general government gross debt (GGGD) approaching 100pc of GDP in 2015-16 under Fitch's revised baseline estimates - the upper limit of the level consistent with the UK retaining its "AAA" status - the likelihood of a downgrade has therefore increased.
Fitch is clearly concerned and apparently so are the other rating agencies. One may ask, does it really matter? The issue of course is perception. After the US downgrade the equity markets saw some of the worst volatility in years.
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