8 Dec 2009

UK tests the limits of its AAA credit rating

Forget parliament. The chancellor should really be presenting what might be his final pre-budget report in a small Treasury office to the audience that really matters. Three people: the sovereign debt analysts at the three main credit ratings agencies.

Two have already expressed concerns about the sustainability of the gold standard AAA-rating that helps enable the UK to raise debt cheaply.

With exquisite timing Moody’s chose today, as the Treasury was putting the final touches to its PBR, to announce similar concerns.

In its quarterly Sovereign Debt Monitor it said that the UK was “testing the limits” of the AAA rating.

In an adverse scenario, the UK’s debt to GDP ratio could spiral to 105 per cent in 2013, with the debt interest payments required to service this mountain of debt taking up one in every seven pounds of tax revenue spent in that year. Moves in that direction would see the UK forfeit the AAA rating, say Moody’s.

The key risk that Moody’s are worried about is a political commitment to cut – “the maintenance of the AAA rating of the UK government will have to be validated by actions in the not-too-distant future.”

So as I said, incredible timing for the Treasury. It could have been worse. The UK is in a club of two with the US as a “resilient nation”. But Moody’s does not have these concerns about, say, France or Germany.

Now, of course, a credit rating is just that: an opinion. The head of the DMO told me earlier this year that any actual downgrade could lead to only an “imperceptible” change in the costs of servicing Britain’s national debt.

Last night economist Richard Koo told me that the UK should “go after” the credit ratings agencies which in the mid-90s wrongly downgraded Japan to a rating below that of Botswana.

But Moody’s intervention goes to show who are the real targets of tomorrow’s fiscal ferreting.