Fitch downgrades UK credit rating to AA+

LONDON, United Kingdom – Fitch on Friday, April 19 (Saturday in Manila) stripped recession-threatened Britain of its top triple-A rating, moving it down one notch to ‘AA+’ as a weaker economic outlook continues to push up the country’s debt.

In response, the coalition government indicated that the downgrade would not sway it from finance minister George Osborne’s controversial policy of deep cuts to state spending.

Fitch meanwhile said in a statement published after the close of British markets: “The downgrade of the UK’s sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch’s medium-term projections for UK budget deficits and government debt.” It gave Britain a ‘stable’ outlook.

“Despite the loss of its ‘AAA’ status, the UK’s extremely strong credit profile is reflected in its ‘AA+’ rating and the Stable Outlook,” Fitch added.

The downgrade comes almost two months after rival agency Moody’s also stripped Britain of a triple-A debt rating, saying government debt was still mounting and that growth was too weak to reverse the trend before 2016. Downgrades can cause a country to pay higher interest for its debt.

Friday’s development meanwhile comes ahead of official economic data out next week that will show whether Britain fell into recession during the first quarter of 2013.

Ahead of Thursday’s GDP data, the government indicated that it would stick by its austerity program.

“This (downgrade) is a stark reminder that the UK cannot simply run away from its problems, or refuse to deal with a legacy of debt built up over a decade,” the Treasury said in a statement.

“Fitch themselves say the government’s ‘continued policy commitment to reducing the underlying budget deficit’ is one of the main reasons UK debt now has a ‘stable’ outlook.”

The Treasury added: “Though it is taking time, we are fixing this country’s economic problems. The deficit is down by a third (since 2010), a million and a quarter new private sector jobs have been created and the credibility we have earned means households and businesses are benefitting from near record low interest rates.”

HSBC bank economist Simon Wells said the latest downgrade “serves as a reminder of the tricky situation that Chancellor George Osborne finds himself in.”

He added: “On the one hand, the IMF is calling for a slower pace of deficit reduction. At the same time, ratings agencies are scrutinizing deteriorating public finances.”

Fitch said it was revising down its forecast economic growth for Britain in 2013 and 2014 to 0.8% and 1.8% respectively, from 1.5% and 2% six months ago.

“The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery,” it said.

Fitch added: “Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the UK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis.”

Britain’s economy has been hit hard by the eurozone debt crisis. Though not a member of the eurozone, the country counts the single currency bloc as its main trading partner.

Meanwhile ongoing state austerity measures from the coalition government that took power in 2010 have also hindered Britain’s growth.

Recent official data revealed that British gross domestic product (GDP) shrank 0.3% in the fourth quarter of 2012 compared with the previous three months.

Another contraction in the first quarter of 2013 would place Britain in its third recession in under 4 years.

“Today’s downgrade is not good news for the UK economy but worse could follow if next week’s preliminary Q1 2013 GDP growth data show a contraction and therefore a technical ‘triple dip’ recession,” said Wells.

“While our central case is for this to be avoided… it cannot be ruled out. Things could get worse before they get better.” – Rappler.com