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Wed, 23 April 2014 23:37:54
UK toppled from 'triple A' on state spending
23 Feb, 2013 09:30:14
Feb 23, 2013 (LBO) - Excessive state spending that has pushed up debt and failed to generate sufficient growth has triggered a downgrade of UK's credit rating by Moody's Investors Service to 'Aa1' from 'Aaa'.
Many governments, including the UK continued to deficit spent to boost growth through 'stimulus' as a credit bubble collapsed from 2007, after sovereign balance sheets were already bloated by bailing out collapsing banks.

Economists had also warned that particularly in Europe, tighter bank capital requirements would dampen economic activity and would negate attempts by central banks themselves to encourage the same banks to lend.

Mood's said UK gross state debt has risen to 96 percent of gross domestic product.

The outlook at the new credit level was 'stable' with Moody's expecting an tighter fiscal policy to reverse rising debt.

The full statement is reproduced below

London, 22 February 2013 -- Moody's Investors Service has today downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa. The outlook on the ratings is now stable.

Moody's downgrades UK's government bond rating to Aa1 from Aaa; outlook is now stable

The key interrelated drivers of today's action are:

1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade;

2. The challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament;

3. And, as a consequence of the UK's high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.

At the same time, Moody's explains that the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.

The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.

In a related rating action, Moody's has today also downgraded the ratings of the Bank of England to Aa1 from Aaa. The issuer's P-1 rating is unaffected by this rating action. The rating outlook for this entity is now also stable.

RATINGS RATIONALE

The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process. Moody's says that the country's current economic recovery has already proven to be significantly slower -- and believes that it will likely remain so -- compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s. Moreover, while the government's recent Funding for Lending Scheme has the potential to support a surge in growth, Moody's believes the risks to the growth outlook remain skewed to the downside.

The sluggish growth environment in turn poses an increasing challenge to the government's fiscal consolidation efforts, which represents the second driver informing Moody's one-notch downgrade of the UK's sovereign rating. When Moody's changed the outlook on the UK's rating to negative in February 2012, the rating agency cited concerns over the increased uncertainty regarding the pace of fiscal consolidation due to materially weaker growth prospects, which contributed to higher than previously expected projections for the deficit, and consequently also an expected rise in the debt burden. Moody's now expects that the UK's gross general government debt level will peak at just over 96% of GDP in 2016. The rating agency says that it would have expected it to peak at a higher level if the government had not reduced its debt stock by transferring funds from the Asset Purchase Facility -- which will equal to roughly 3.7% of GDP in total -- as announced in November 2012.

More specifically, projected tax revenue increases have been difficult to achieve in the UK due to the challenging economic environment. As a result, the weaker economic outturn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, and is likely to continue to do so over the medium term. After it was elected in 2010, the government outlined a fiscal consolidation programme that would run through this parliament's five-year term and place the net public-sector debt-to-GDP ratio on a declining trajectory by the 2015-16 financial year. (Although it was not one of the government's targets, Moody's had expected the UK's gross general government debt -- a key debt metric in the rating agency's analysis -- to start declining in the 2014-15 financial year.) Now, however, the government has announced that fiscal consolidation will extend into the next parliament, which necessarily makes their implementation less certain.

Taken together, the slower-than-expected recovery, the higher debt load and the policy uncertainties combine to form the third driver of today's rating action -- namely, the erosion of the shock-absorption capacity of the UK's balance sheet. Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.

In summary, although the UK's debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other Aaa-rated issuers.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the UK's Aa1 sovereign rating partly reflects the strengths that underpin the Aa1 rating itself -- the underlying economic strength and fiscal policy commitment which Moody's expects will ultimately allow the UK government to reverse the debt trajectory. The stable outlook is also an indication of the fact that Moody's does not expect further additional material deterioration in the UK's economic prospects or additional material difficulties in implementing fiscal consolidation. It also reflects the greater capacity of the UK government compared with its euro area peers to absorb shocks resulting from any further escalation in the euro area sovereign debt crisis, given (1) the absence of the contingent liabilities from mutual support mechanisms that euro area members face; (2) the UK's more limited trade dependence on the euro area; and (3) the policy flexibility that the UK derives from having its own national currency, which is a global reserve currency. Lastly, the UK also benefits from a considerably longer-than-average debt-maturity schedule, making the country's debt-servicing costs less vulnerable to swings in interest rates.

WHAT COULD MOVE THE RATING UP/DOWN

As reflected by the stable rating outlook, Moody's does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK's debt burden during the multi-year fiscal consolidation programme. Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation.

Conversely, Moody's would consider changing the outlook on the UK's rating to positive, and ultimately upgrading the rating back to Aaa, in the event of much more rapid economic growth and debt-to-GDP reduction than Moody's is currently anticipating.

COUNTRY CEILINGS

The UK's foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.

IMPACT ON OTHER RATINGS

Moody's will assess the implications of this action for the debt obligations of other issuers which benefit from a guarantee from the UK sovereign, and will announce its conclusions shortly in accordance with EU regulatory requirements. Moody's does not consider that the one-notch downgrade of the UK sovereign has any implications for the standalone strength of UK financial institutions, or for the systemic support uplift factored into certain UK financial institutions' unguaranteed debt ratings.

PREVIOUS RATING ACTION

Moody's previous action on the UK's sovereign rating and the Bank of England was implemented on 13 February 2012, when the rating agency changed the outlook on both Aaa ratings to negative from stable. For the UK sovereign, the actions prior to that were Moody's assignment of a Aaa rating to the UK's government bonds in March 1978 and the assignment of a stable outlook in March 1997. For the Bank of England, the action prior to the one from February 2012 was the assignment of a Aaa rating and stable outlook in March 2010.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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READER COMMENT(S)
9. Truth Mar 10
No matter what these Keynesians think, the free market will react to the excess printing and wasteful spending. Economic growth is and always will be generated by working hard, under-consumption, saving the balance and investing the savings.

Remember, stimulus is always followed by run away inflation. It happened in china as well. The US is in a no return path towards chaos. The FED prints $85 billion a month!! Does that not ring any bells for you Keynesians? The longer we resist the recession, the worst the recession gets. Now the world is headed to an even greater depression lead by the US. Keynesianism is wrong! Austrian Free Market Economics is right and natural!

8. Keynesian Utopia Mar 07
This is really a no brainer. On the contrary this is exactly what needs to happen.

In earlier ages - before unionization etc - wages could fall quickly re-creating full employment fast after a credit bubble burst.

Persistent unemployment is mainly a result of rigid wages as well as other state interventions that prevent people from doing what they want/need to do, including income tax, which destroys capital.

The Keynesian/monetarist prescription of printing/spending which generates inflation and currency depreciation also achieves higher employment by cutting real wages.

However in the absense of mis-directed state interventions wages falling in a deflationary scenario (with no currency depreciation and inflation - what you might call an Austrian scenario) only current wages are reduced for a while. Accumulated savings of old and the sick are not destroyed.

Also due to lower prices (deflation) in a post-bubble scenario it does not really hurt workers much to have lower wages. Remember houses etc are also cheaper.

Even the unemployed are helped by deflation because their savings last longer.

In a bubble (may be also driven by over-investment) high wages are part of the problem. To get things back on track, wages have to fall.

So falling wages is not a problem. It is the fist step in the solution.

What was said in the earlier comment about the mainstream media orthodoxy that screams at every correct move is proved by this CNN story. Add bleeding hearts media orthodoxy.

7. BKVWHK Mar 07
It gets worse. These are the perils of austerity/Hayekian aloofness. FDR and Obama were right to follow Keynes.

http://money.cnn.com/2013/03/06/news/economy/economy-uk-pay/?cnn=yes&hpt=hp_t3

6. Your Gaurdian Mar 01
Check this out.
http://www.theedgemalaysia.com/highlights/231995-bnm-says-illicit-capital-outflow-likely-overstated.html
5. Wadda Podda Mar 01
You have yet to rid yourself from the shackles of your masters, still seeking education and employment(if there's any) in those countries. All your links point to anglo saxon media. Gives me the impression that they are your masters still.

If you look at Malaysia as a model then follow Mahatir Mohamed(former caustic Prime Minster of Malaysia). He advised the Malaysian to look East.

During the 96 economic crises the IMF advised Malaysia and the rest of Asia to devalue the currency for the benefit of the Hedge Funds that speculated against Asian currencies Only Malaysia resisted, introduced capital control and turned on the printing press.

And if you are wondering where all that printed money went, then check Transparency International.

They state USD 285 Billions left the country, and that's with capital control.

4. Keynesian Utopia Mar 01
Very true. A large budget deficit does not equal spending. It is worse. It equals overspending.

Further when created money is spent by the state it will create further inflation, already harming people. The employed people also will not have enough money to buy goods since their purchasing power is reduced. The unemployed will have their situation worsened.

When there is a price fall markets start to work. Deflation is not bad as claimed by Keynesians. The best example is stocks. The same applies to houses or any other goods.

However the Feb or BoE will print money to prevent prices from falling further (helicopter drops etc) further prolonging a recovery).

This is why downturns in the US were short and sharp pre-Fed.

That the current recession was caused by lack of regulation is an utter, out-an-out, diabolical, heinous lie spread by Keynesians and other state worshippers.

Credit bubbles develop because of a cyclical bubble in the credit/banking system.

By preventing rates from going up early it is the central banks that prolong bad lending, inflation, asset price bubbles. When they correct the problem is far too big. No amount of regulation can prevent the excessive bad lending when the CB keeps pumping liquidity to resist interest rises in the market- which would limit bad lending without any police power. The belief in regulation is a essentially shift to the worship of the police vs worship of market forces, you may say. Which is the better god? Police or markets? You decide and face the consequences.

That is why the Great Depression and Great Recession was post-Fed and earlier downturns were shorter.

The Fed loose policy infected the ECB primarily through exporter screams to stop Euro appreciation. Therefore ECB ran looser policy than they should have despite Bundesbank knowledge in the matter. Post WWII Germany always ran tight policy had stronger exports and exchange rate (and lower inflation).

Australia's central bank on the other had ignored exporters and continued to tighten and they had a smaller downturn (long before 2007) and they escaped the great recession.

The debate continues :)

3. Hayekian Hot Air Mar 01
No. A budget deficit doesn't equal spending. Austerity does bring about a vicious cycle of low economic growth after a recession, let alone a Great one (of 2007/8) brought about by lack of regulation.
http://www.guardian.co.uk/business/2012/feb/14/austerity-stimulus-divide-eurozone-cuts

The debate continues.

2. Keynesian Utopia Feb 27
No?
Welcome to 'austerity', European style. Britain's 'austerity' started in 2008 with a 20bn stimulus package. Deficit almost doubled. This was Darling.

Stimulus was the new manthra.

By 2010 it was running around 10-GDP deficit. It had the third worst deficit after Ireland and Greece at one time. Is this not spending?

While UK started to try to squeeze later, the damage was done. It is still spending. The orthodoxy in mainstream media is to scream 'austerity' if the deficit falls 20-pct from the previous year, conveniently forgetting that a few years ago a country was running deficit quarter of that size.

But as the article says it was probably the bank capital ratios and the EU FSB that did more damage. Even British Governor King did the same thing.

They have seen the light now though.

http://www.guardian.co.uk/business/2013/jan/06/banks-introduce-minimum-liquidity-standards

At a glance data on UK deficit, see below.

http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data#zoomed-picture

More detailed data at ONS.

1. Blumenskopfens VW Hammerklavie Feb 27
The UK's George Osborne is not a spender, he is a severe austerity and debt reduction advocate. There are many arguments on whether the UK's approach (austerity) and the US Fed approach (stimulus) works. The lead up to this article is not accurate.

http://www.reuters.com/article/2013/02/24/us-britain-osborne-idUSBRE91M0BW20130224, http://thinkprogress.org/economy/2012/10/24/1083531/us-uk-austerity/?mobile=nc and http://www.guardian.co.uk/business/2012/feb/14/austerity-stimulus-divide-eurozone-cuts