The UK government has been warned that, if it fails to get its deficit under control or increase growth so that borrowing isn’t such a large percentage of GDP each year, it could risk having its AAA credit rating from Fitch downgraded.
The warning was also issued to the USA, which is facing massive spending problems whilst no consensus is being reached by the Democrats or Republicans facing each other over the floors of each house. However, the US may not be as worried about the warning; the country already had its rating from Standard & Poor’s downgraded to AA+, but hasn’t seen any damage to its ability to get loans from international finance markets.
The UK could be another matter though, and one of the major accomplishments that the chancellor likes to shout about is protecting the country’s Triple-A rating.
The UK has already been placed on a negative watch by Standard & Poor’s, so this further adds to the issue. Ed Parker from Fitch explained the credit agencies move: “For the UK, we forecast debt/GDP to peak at 97 percent before declining, which would be approaching the limit consistent with it retaining its AAA. So if we see fiscal loosening, extended economic weakness causing slippage in fiscal targets then a downgrade would be likely.”
With more and more credit ratings agencies putting the UK economy on a negative watch, the claims by the government that they are reducing the deficit and restoring market confidence are being severely undermined. Of course, the drive for austerity shows no signs of working. If the credit rating of the UK is reduced, then loans will be more expensive for the government, and as borrowing isn’t going down, as was promised, government spending will have to be reduced even further, harming growth more and creating a vicious cycle.