Will the UK lose its AAA, and does it matter?


Will the UK lose its AAA and does it matter?

The answer to the first question is "probably" - although the timing is uncertain.

And the answer to the second question is, "Possibly not, in an economic sense, but probably a good deal, in a political sense."

The reason the AAA is in jeopardy is that the government is taking a bit longer than it promised to stabilise public sector debt as a percentage of GDP.

Even with the benefit of the significant new interest rate subsidy the government receives on the third of its debt held by the Bank of England, and despite a windfall of more than £28bn from the liquidation of assets held in Royal Mail's pension fund, public sector net debt is rising far faster and for longer than the Treasury hoped a year ago (although, to further confuse like-for-like comparisons, there is also a negative impact from reclassifying Northern Rock and Bradford & Bingley debt).

So, on the definitions used in this country, net debt now peaks at 79.9% of GDP (the annual value of what the UK produces) in 2015-16, before falling very slightly to 79.2%.

And on the eurozone's calculation, UK public sector debt reaches a peak of 97.4% in 2015/16 (remember that France lost its AAA on the basis of a profile for the evolution of its debt not conspicuously worse than the UK's - although arguably with fewer available economic remedies, because of its membership of the currency union).

The important comparator is this: 18 months ago, the Office for Budget Responsibility (OBR) was forecasting that public sector net debt would reach its peak a year earlier, in 2014-15, and it thought that peak would be considerably lower - 70.9% of GDP (87.2% on the eurozone's basis).

To put all this in slightly less befuddling terms, the UK government now expects to owe its creditors £1.442tn by 2016/16, which is £83bn more than it was forecasting 18 months ago for future debt.

And the other relevant point is that there is plenty of evidence that once public sector debt reaches that range of 80-100% of GDP, economic performance suffers.

That's one reason why the chancellor has decided that public spending cuts and tax rises, or the cliched austerity, have to roll relentlessly on until at least 2018.

Anyway, to get back to the question of the AAA, if the credit rating agencies had a high degree of confidence that public sector net debt would indeed reach a peak of almost 80% in 2015/16, then the UK might retain its AAA.

For example, Moody's - which has a "negative outlook" on the UK's credit rating - recently said that what mattered was that the UK's "debt metrics" should "stabilise within the next 3-4 years".

Moodys Credit ratings agency Moody's has a negative outlook on the UK

This all-important confidence in an end to the rising burden of debt is umbilically linked to what happens to economic growth in the coming weeks and months - because growth determines the tax revenues the Treasury is likely to receive.

Since the crash of 2008, the UK economy has consistently performed far worse than expected by the OBR and most independent forecasters.

If you believe that the UK's luck has now changed, and that future economic surprises will be positive, then the UK may just keep the triple AAA.

If on the other hand you fear that most forecasters are still failing to properly capture the negative impact of "deleveraging" - or households, businesses, banks and the government trying to cut their big debts - and if you see a serious risk of a further worsening in the eurozone's mess, then you would question whether even the anaemic recovery expected by the OBR in 2013 will take place.

As it happens, research by Professor Costas Milas of Liverpool University suggests that the latest deterioration in the UK's fiscal prospects should not automatically lead to a downgrade.

That said, the ratings agencies have made it clear that the UK is in a saloon called "last desperate chance to retain AAA" - and any more fiscal misbehaviour will inevitably see it ignominiously ejected.

If the UK loses its cherished membership of the AAA club, does it matter?

Well, it would certainly be something in a political sense - because the prime minister and chancellor have swanked so much in recent years about how great it is that the UK is AAA, and how they would work tirelessly to retain that glistening kitemark of creditworthiness.

So if the UK loses AAA, there will be a tsunami of schadenfreude from the opposition.

But here is where you may well wonder why on earth you have devoted an irreclaimable and precious few minutes of your life to reading this stuff - because it is plausible that losing the AAA will have little economic impact.

Big swinging investors tell me two things.

Start Quote

In an ugly contest between over-indebted rich developed economies, the UK's public finances look a lot less ugly than many others”

End Quote

First, that what matters to them is the underlying economic performance, not whether the badge is AAA or a notch lower.

And, as it happens, they have pushed up the cost for the government of borrowing for longer periods in the past few weeks and months, precisely because of the anticipated fiscal debt worsening (which, if you choose, you could see as investors discounting the future loss of AAA).

Second, that the fundamental status of the UK as a safe haven for investment is not in jeopardy.

You may think that is extraordinary, given the huge rises in the government's debt burden.

But, as I've bored on about many times, investors have to put their money somewhere.

And in an ugly contest between over-indebted rich developed economies, the UK's public finances look a lot less ugly than many others (a big hello to many of our allies across the Channel).

So here is the terrible paradox: if the eurozone were to be seen to be fixing itself, that would be good for the British economy (companies would feel more confident about investing, trade would pick up, and so on); but the government's borrowing costs would probably rise, because investors would feel less worried about lending to the eurozone and would lend relatively less to the UK.

Or to put it another way, a fall in the price of UK government bonds (gilts) and the corresponding rise in government interest costs might well be a sign that things are getting better, in a fundamental sense, and would not be the canary-in-the-coalmine warning we're all about to die of debt-induced asphyxiation.

Why all the bloomin' fuss about the AAA then?

Well, as a Treasury official put it to me, "Cameron and Osborne have created a rod for their own back with their AAA fixation - and it's a bit of a pain".

Robert Peston

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 26.

    If we lose the AAA rating borrowing gets a bit more expensive. Bad for GO and all of us.
    But sterling should go weaker so all of you thinking of holidaying abroad after this year's rotten weather will have to pay more, so maybe stay at home - next year should be good here!!!!!
    Then we stop importing so much cos it's expensive, & we export more cos we're cheaper.
    Sorry 2 b optimistic!

  • rate this

    Comment number 25.

    NATIONAL-DEBT of GBP1+TRILLION [MILLION-MILLION] century-plus; well-beyond 6-year's.

    EU-style property 'purchase-tax' 17.5% Bruxelles 1989 'inevitable'; 40% [20%-each buyer-&-seller] easily-better-than 1p on-a-pint.

    Pension's too are 'big-ticket'; touch-of-honesty please.

    Kid's & their-kid's... doomed-to-emigrate.

  • rate this

    Comment number 24.

    #6 always nice to see someone being hooked by the Labour line.

    The simple truth is that it does not bash the poor, nor does it bolster the rich but instead attacks the middle income - those earning £40-70k pa particularly those in their late 40s and 50s who want to save a bit more to their pensions.

  • rate this

    Comment number 23.

    Hamel & Prahalad in "Competing for the Future" observe that when profit is suffering there are 2 types on Managers. Type 1 cut cost but do not address the underlying growth issue, hence after a period of apparent profit the problem returns. Type 2 address the issue stopping growth while being prudent with cost and after a period the company returns to healthy profit. Guess which type Osborne is!?

  • rate this

    Comment number 22.

    Credit Ratings Agencies - about as Financially credible as Nigerian Fraud Rings.

  • rate this

    Comment number 21.

    "Should have cut harder", cry Tories: trash & rebuild from scratch

    Reminds of (J) Bond/Bourne trick: jump down Unfair Austerity stairwell, take Europe with us as padding

    Staggering up, waving Statements of Bankruptcy masked with crayon & blood, to claim "credit" over dying customers

    Fraud shared. West electorates as children told: 'we live in democracy', from no party a plan to disabuse

  • rate this

    Comment number 20.

    This from the same agencies that gave AAA ratings to the banks before they all needed bailing out.

    Makes you laugh that the UK has the lowest borrowing rates it has ever had but is in line for a ratings drop.

    Either the markets are stupid or the ratings agencies, or maybe both.

  • rate this

    Comment number 19.

    The whole rating system is pointless as an indicator of worth as the crash showed only too clearly. One could be forgiven for thinking that it’s really a manipulation tool of perception backed by the banks to ensure that nations tow a line that is beneficial to their interests.

    These ratings are only as relevant as you percieve them to be as the US have shown

  • rate this

    Comment number 18.

    do fish take the bait just to see who is on the other end of the line? Or do they swallow hook and sinker because they are fooled by the chobbly chortlers?

  • rate this

    Comment number 17.

    Comment 12# I totally agree 100% . Stop all foreign aid .... It staggers me that as a country we are still prepared to allow our politicians to send so much money to other countries.

  • rate this

    Comment number 16.

    The USA lost its AAA Rating ages ago, with zero effect politically, or economically, and much the same applies to France.

    Apart from the (lack of) foresight twins pinning far too much to this attribute, and then having to give it up, it matters very little politically.

    Everyone has already made up their minds about DC & GO, much as they have the two Eds..... so losing the AAA will matter little

  • rate this

    Comment number 15.

    These are the same rating agencies that failed to predict the banking crash - why are they still relevant ?

  • rate this

    Comment number 14.

    As often in these things, what really matters is not the facts, but rather our individual and collective perception of them. The economy's health relies more on our perceptions of it than the facts. The truth most fail to accept is that the economies of the world have no true substance, but that also, doubt is the enemy. Belief (confidence) fuels the economy and doubt (fear) derails it.

  • rate this

    Comment number 13.


  • rate this

    Comment number 12.

    Every family £1000 poorer this year

    Osbourne should slash spending and cut taxes

    He can start by stopping ALL foreign aid increasing from £8.4billion this year to £12.6billion in 2014. Bring our troops home from foreign lands £18bn and means test Winter Fuel Allowance £2bn.

    That's £32.6bn add to that the cost of the EU 118bn per year = £150.6bn... There you have it, books balanced!

  • rate this

    Comment number 11.

    Three things that matter more are:-
    1 How much as the average tax payer already put into the econimic hole?
    2. How much worse of are we because we have not had pay rises?
    3.The very rich do not need pensions so how were they worse off after yesterdays statment?
    If the chancler has a deficit reduction plan then it should do just that which (4G exception)which it is not doing!

  • rate this

    Comment number 10.

    The rating agencies it seems are there to provide advice to investors about which country they can trust to place their wedge. However, if you're a good investor, you don't really need this advice.

    But if you're a govt, still desperately hoping to borrow, borrow, borrow, any group or ratings agency telling you you're untrustworthy is very embarrassing.

    And when is this austerity going to start?

  • rate this

    Comment number 9.

    AAA - Aren't they little dinky batteries ? I have them in my mouse !

  • rate this

    Comment number 8.

    IMHO agencies have had too large an influence.

    It's all about confidence.

    Agencies have their place in the real world acting as a barometer as to whether a firm is worth working with, but it doesn't translate to countries.

    MP's looking for personal political gain just see their headline comments and talk down the economy, which every one else (esp the media) then blindly follows.

  • rate this

    Comment number 7.

    Robert, are you certain that we have less debt than France or Germany?

    I thought that if all debt was added we are by far in the worse position.


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