Standard & Poor’s is the last of the three major credit rating agencies to downgrade its outlook on the UK’s triple-A rating. S&P said the negative outlook was based on expectations that “net general government debt as a percentage of GDP [will] continue to rise in 2015, before declining again. Future employment or growth shocks could pressure government finances further,” it stated in a report.
“We are … revising our outlook on the unsolicited long-term ratings on the UK to negative, from stable, reflecting our view of a one-in-three chance that we could lower the ratings if the UK's economic and fiscal performances weaken beyond our current expectations,” stated the S&P report.
Forecasts for the AAA Rating Cut
Kathleen Brooks, research director at FOREX.com, anticipates that a rating cut will likely come in the second quarter of 2013, though she says she doesn’t expect this cut to be a true game changer.
“In a world where triple-A credit ratings are fairly hard to find, investors may end up with no choice but to continue to buy gilts, especially if the eurozone crisis flares up again as we expect it to sometime in 2013,” she stated in a recent research report.
“When France was downgraded at the start of 2012 it barely caused the euro to move. Likewise, its 10-year bond yield actually fell 100 basis points over the course of 2012 as it attracted safe haven bond flows that were leaving the peripheral markets of Spain and Italy. The same may be true for the UK,” she said.
Professor Philip Booth from the Cass Business School in London predicts that the chances of a UK credit rating downgrade in 2013 are “fifty-fifty.”
“The event of a downgrade itself would not be catastrophic. However, it would reflect deep underlying long-term fiscal problems,” said Booth.
Medium-Term Concerns
While most commentators seem laissez-faire about a potential ratings cut in the short-term, Morningstar's senior ETF analyst, Jose Garcia-Zarate, explains that there could be medium-term concerns.
"The risk is more in the medium-term particularly if we see the eurozone getting their act together while the UK continues to struggle," said Garcia-Zarate. "Much of the investment flows into gilts have been predicated on fear of the euro. If that element goes and the UK is still in trouble then investors will start caring much more about the ratings."
Early in 2012, Moody's and Fitch each announced that they had a negative outlook on the UK's triple-A rating.
Following the French
This general threat to the UK’s triple-A credit rating comes after some recent downgrades to French government debt.
Rating agency Moody’s announced in November that it had downgraded French government bonds from a triple-A rating to the one-notch lower rating, Aa1, with a negative outlook. In January, S&P had stripped French government bonds of their prized AAA rating.
