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Fitch warns UK on AAA rating

Ratings agency says failure to control debt levels is a threat to the UK’s sovereign credit rating.

 
Fitch warns UK on AAA rating

Fitch has warned that the UK’s triple-A credit rating is at risk as the government is failing to control debt.  

The UK’s inability to meet public debt targets ‘weakens the creditability’ of its AAA status according to the ratings agency after yesterday’s Autumn Statement from chancellor George Osborne.

In the statement Osborne announced that austerity is due to continue until 2018, a year longer than expected, and debt as a proportion of the country’s output will not fall until 2016-2017.

Growth forecasts were also cut by the Office for Budget Responsibility (OBR) for the next five years, and expectations for this year were slashed from 0.8% to -0.1%.

The loss of the AAA status would mean that the UK’s sovereign debt, or gilts, would be perceived as more risky by investors and could impact the bond market.

However Fitch threatened to downgrade the country’s credit rating in March if debt levels weren’t under control in the next two years and added that the Autumn Statement confirmed the scale of the problem facing the UK.

Fitch added: ‘The government has chosen not to chase the supplementary target by deploying additional consolidation measures over the next two years. In our view, missing the target weakens the credibility of the UK's fiscal framework, which is one of the factors supporting the [AAA] rating.’

Other agencies have also been eyeing the country’s credit rating. Moody’s threatened to downgrade the UK in February and will review its status early in the New Year, whilst Standard & Poor’s affirmed the AAA rating in July based on projected stronger economic growth.

Fitch will formally review the rating in March 2013, after the Budget.

25 comments so far. Why not have your say?

White Stick follower

Dec 06, 2012 at 19:03

Why are governments so concerned about Ratings Agencies when the Agencies have hardly distinguished themselves. Look at their performance in relation to the banking collapses, Lehmans for example, an 85 % fall in share value by Feb 08 over the previous year prior to the downgrade and collapse. Still A+; and worse still fund managers happily punting client money [not their own] into Lehmans, when the mess was as clear as day, even The Times warned.

It seems to me that the Ratings are more about politicians ego than national interests.

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Philmo

Dec 06, 2012 at 21:00

Simples WSf

We cannot afford to pay the interest rates on anything less than an AAA loan!

The rates the Greeks and Spaniards pay would totally cripple us! A significant proportion of public servants would have to go and the rest would have to accept defined contribution pensions. Recipe for national mayhem which the politicians fear they cannot control.

People & politicians in the UK just cannot comprehend that you cannot spend your way out of debt, though there are signs that Osborne's beginning to get it.

The sooner the BoP becomes +ve the sooner we can start paying debt down.

The Canadian at the helm of BoE should help, with his more disciplined attitude to debt.

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White Stick follower

Dec 06, 2012 at 21:15

Well if we should descend below AAA, then perhaps we'll stop borrowing money at the current rates and then re-lending it to other States, such as Ireland, at rates which are lower than they would have to pay in the commercial markets.

That said I have little faith in the ability of the Agencies to rationalise their supposed expert opinions. As was said on TV yesterday what is more important is how the markets see UK. Given that the Agencies are, allegedly, sponsored by corporate interests one wonders how impartial their pontifications actually are.

We should not forget the old adage, 'lies, damn lies and statistics'. Who really knows what any State is worth, as the figures are massaged and manipulated, as I am sure are the Ratings, so as to give the required answer.

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Jeremy Bosk

Dec 06, 2012 at 22:06

Debt is increasing because this government has deliberately added to the mass unemployment already caused by the worldwide recession.

Unemployment has increased government expenditure on benefits and decreased government income from taxes. So any further efforts to cut government spending would be criminally insane.

You want to pay off debt? Get people working, off benefits and paying taxes.

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Philmo

Dec 06, 2012 at 22:37

JB

Think you'd be hard pressed to prove deliberate action, but yes there is a circle of indebtedness and tax loss.

The prime reason we're not paying off debt is because far too many people are employed in a consumptive industry eg Starbucks, entertainment, football, etc or in an overhead capacity eg HMG, LA's and Quangos.

And too few are employed in productive capacity eg manufacture of products or services which can be sold for foreign revenue.

The ratio needs correction.

Not only that - there is a p*ss poor work ethic in the country, it's more a couldn't be arsed culture these days.

We've just been used to the soft living started by MT, wasting N Sea royalties to promote life-style instead of investing it in UK plc. It's a mindset which once adopted is very difficult to shake off.

Just consider the attitudes displayed on the financial fora - how many whinge about fuel tax - it's all self, self self. How many actually accept that raising fuel tax is an obvious and cheap revenue raiser which is actually beneficial to the environment and encourages people to use more efficient transport, keeping the overheads down!

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jon d

Dec 06, 2012 at 23:02

As I understand it, the Irish bit the austerity bullet hard and went in for really swinging cuts - fast. The result is that the worst is well behind them now. I suspect if Osborne had also cut really hard at the onset of the crisis, we'd all understand what the game is about (keeping the interest rates we have to offer on our bonds down), and we'd be in recovery now. Then mendacious blabberers like Ed Balls would have even less to shout about than they have now. I think that Osborne is doing a better job than any other UK politician would have managed. He has managed to keep going with precious little support, even from with the Coalition and his Party. It goes without saying that our predicament means that the multinationals absolutely must be made to pay proper levels of corporate taxes like British companies. Right now they operate at a clear advantage to indiginous industry! If this were addressed hard it would bring a lot into the UK's coffers.

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Jeremy Bosk

Dec 06, 2012 at 23:46

Philmo

I agree that North Sea Oil money was wasted. Look how much better the Norwegians have managed with their sovereign wealth fund.

I agree about fuel tax.

I agree we need to invest more in manufacturing for all sorts of reasons. Sadly, modern manufacturing is done by a few managers and (graduate) engineers aided by a great many robots. The days when manufacturing provided work for millions and millions are long gone. Even in China jobs are being lost to automation, computerisation and robotics. Jobs for unskilled and cheap labour have migrated to Vietnam and Thailand.

The majority of jobs are in services and in high skilled, highly specialist graduate level science and engineering. The small number of people working in manufacturing do not earn enough to keep consumer spending and the personal service and retail sectors.

So we need service sector jobs in industries that sell overseas or attract overseas visitors. Tourism, film and TV, publishing, higher education, financial services (run intelligently of course) will have to earn the money to support consumer spending and provide the jobs for all the hairdressers, hospitality staff and shop assistants.

Manufacturing companies that earn profits can of course contribute corporation tax to help fund the welfare state.

Let robots do the work and pay the taxes. I am only half joking.

Multinationals have a duty to their shareholders to make and keep as much money as possible. So they can and do play off national tax authorities against each other. Coordinating an international response to tax companies fairly is not going to happen in this millennium. So we may as well aim to win the corporation tax competition and abolish it. Part of Ireland's historic success was due to consistently lower corporation tax attracting overseas investors.

Remember that some of the multinationals are British and in many overseas jurisdictions they are the ones not paying local taxes.

In a free trading world, tax can only be collected on immovables like property, local workers and local purchases (such as fuel). Even that has limits as we learned from the tales of foreign hauliers filling up on DERV before getting on a UK bound ferry and thus being able to undercut UK hauliers on the return trip with UK export cargoes.

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Philmo

Dec 07, 2012 at 00:03

JB

Wow - for once I don't disagree with anything you've said!

Though from past dialogue you're clearly left of my centre! There's no way I could countenance Ed Balls blustering his way forward, running UKplc on a payday loan basis!

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Jeremy Bosk

Dec 07, 2012 at 01:01

Philmo

The world is more complicated than any simplistic right-left dichotomy. I generally align with capitalist economics and liberal social values. I try to see the world as it is rather than as I would like it to be. From which I try to reason logically.

I utterly fail to see any logic in the austerity policies.

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Philmo

Dec 07, 2012 at 09:22

JB

Yes I align with your stance, though I see the austerity policy as one which hopefully get people and businessesgenerally to the mindset of reining in frivolous spend, therefore exist within means and hence pay down debt.

No matter which way you look at it you cannot spend your way out of debt - all Ed Balls' ideas will achieve is to put off the evil day when the bullet is bitten, which it must at some stage, otherwise we become a basket case like Greece.

As long as we run an annual deficit we will grow debt and eventually lose our credit rating, increased interest rates follow and immediately you're on the downward slippery slope which Greece has shown is almost impossible to escape.

Aren't we better following the Scaninavian and Canadian more disciplined models which they have clearly shown is the way to go? I think so.

I think the appointment of an experienced Canadian banker to BoE was most astute, a fresh mindset brought to bear at the tiller.

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Jeremy Bosk

Dec 07, 2012 at 11:09

Philmo

One person's frivolous spending is another person's income.

All our essentials - gas, water, electricity, food, essential clothing and shelter - are produced by about ten per cent of the population. All the rest, beyond subsistence, is luxury. TV, radio, fridge, alcohol, sweets, tobacco, cars, cinemas, theatres, fashion clothing... So 90 per cent of the population are non productive in your sense. Some are too old, too young, sick, disabled and so on. Most are paid to do things which are frivolous.

I think a nation CAN spend its way out of debt: although not an individual. If people and firms with savings all went out and bought something; that money would circulate. Shops, warehouses and manufacturers would buy or make new stock. Increased demand creates more jobs. People with jobs can pay their debts. Governments with more tax payers and more revenue can pay their debts. That is consumption led growth.

Infrastructure spending and building new factories to meet expected demand for new and better products would create investment led growth. Infrastructure spending by government using borrowed money would generate jobs and put money in the economy to create consumption led growth. The growth in employment would mean more people paying taxes. The increased taxes would repay the new borrowing.

People who spend money create jobs. People with jobs pay taxes. More jobs lead to higher tax revenue so governments can pay their debts.

There is plenty of money available as savings and credit to invest and get the economy going again. All it takes is for the Tories to start acting in the national interest. Those governments that have created similar misery and squalor in Europe and America through economic sabotage could help by acting in the common interest of humanity. Reckless bankers and consumers are a sideshow. This recession is a political creation.

Growth provides the income to pay debts. The Tories choose to deny this and choose to lay waste to this country.

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White Stick follower

Dec 07, 2012 at 11:37

A major underlying factor in the attempts to balance our economy is the fact that vast numbers of people are taking money out of the pot having put none in. The 'unspeakable' matter of endless immigration, is now being acknowledged openly by an increasing number of ministers.

Those of us who have grown up here,worked here, and paid taxes & National Insurance are being forced to pay for the upkeep across the spectrum of disciplines, of the unknown millions who have contributed nothing. In respect of National Insurance in particular, has any one ever tried to claim from an Insurance Company when they have paid no premiums? I doubt such a person would have any success.

As for our manufacturing industry, well we were happy to sell millions of pounds worth of machinery and technical knowledge to other 'third world' countries, without a thought as to what they would do with it. Surprise, surprise, they now make what we made and sell it cheaper, so our factories close down.

Regarding the wider economic disasters, such as selling 50% of our gold holding when the price was low, and worse still announcing it in advance, selling off our oil reserves in advance of production etc etc, one has only to look at the economic 'blue sky' thinkers in the Treasury, and of course the financial wizards who have occupied No 11.

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Philmo

Dec 07, 2012 at 12:53

JB

Sure GDP includes the consumptive spend which simply circulates. And as long as GDP is fed with QE it inflates and people incorrectly call this growth.

Real growth can only come from selling goods and services overseas to countries that wish to "develop". I agree GB's record at No11 was pathetic, for a man with financial training, but what do you expect from a left wing chancellor? The ideology just can't, in the real world, co-exist with logical economics!

To generate "growth" by feeding consumptive business eg fast food, gambling, night clubs, holidays abroad, generally getting your jollies off etc will lead absolutely nowhere, especially if funded by borrowing.

WSf

You got it - we sell the old kit to developing nations, but use and develop the leading edge stuff! This is the only way forward for developed nations, together with financial, legal and other "high end" services.

The result however is that our business and industrial core becomes increasingly cerebrally orientated which results in less opportunity for those with more manually orietated skills. Quite simply the manual labour force of developing nations is cheaper.

But if you think sideways there are opportunities for manual skills which could be developed, improvements in lifestyle for example (which has been discussed ad-nauseum on another thread)

Near ideal business models are: Dyson who carry out innovation and design here and manufacture in a developing nation; ARM who innovate and design only, selling the use of their intellectual property worldwide. The Formula 1 industry is an exception in that the majority of world innovation, design and manufacture occurs in the UK - because it's leading edge at all stages.

Someone else's turn!

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Jeremy Bosk

Dec 07, 2012 at 12:54

White Stick

Your first paragraph: so create jobs. Improve the education system so that people are able to do the modern jobs which require much more than pulling levers and pushing buttons. Improve the NHS so fewer people are sick. Brainwash people into eating right and taking sufficient exercise.

As for immigration: the evidence is that countries which encourage the immigration of highly educated people benefit greatly. The USA and Australia particularly excel at getting clever students from places like India and China to come and learn at their universities and then stay to develop great companies which employ millions of the locally born. Google is a prime example. Immigrants in general go to new countries with the intention of working and bettering themselves. Most do. NB that is not the same as wanting unrestricted immigration of the unskilled and ineducable or of those who refuse to integrate with the local culture.

Immigration is also a separate argument to the one on over population, housing shortages and overcrowding. I would happily reduce the anti-social elements of our population and encourage responsible family planning.

It would also make sense to turn Greece into a retirement home for elderly Brits. They get the jobs, we get the houses. The old folks can stop complaining of the cold and watch Coronation Street via the internet. Sitting here wearing two thermal vests, two shirts and two pullovers, I am quite serious!

There was never any way to stop other countries from getting production machinery and making their own consumer goods. There is also no way we could ever compete on labour costs with countries whose citizens do not require central heating, two cars per family, 60" plasma TVs and all the other "necessities" that make living in this country so expensive.

Also, most of the developing world has young populations so does not need to have such high taxes to support the old and the sick. Their costs are lower. Instead of nostalgia for our industrial past - of ill paid, back breaking labour - we should concentrate on educating ourselves and investing for new, high tech jobs that workers in other countries are unable to do.

We are still world leaders in some aspects of science, engineering and technology. Even the service industries can provide highly skilled and highly paid employment. Some banking and financial activities are actually useful. Legal services such as patents and copyright, arbitration... British made films, TV, music, publishing all sell in hundreds of countries worldwide.

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Jeremy Bosk

Dec 07, 2012 at 13:08

Philmo

We can make or grow everything we need with 10 per cent of the population. This is true of all the advanced societies. The rest of the population can either rot on the dole or work in the service sector. There is nothing wrong with providing a service instead of making things.

If the barber cuts the gardeners hair, the gardener digs the electrician's garden and the electrician rewires the barber's kitchen, they are all better off than if none of this activity took place. To say that service jobs are not real jobs and serve no purpose is wrong.

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Philmo

Dec 07, 2012 at 15:22

JB

Good idea Greece, just 1 prob though,I suspect that eventually, rather too much of UK GDP would be spent in Greece! Also it's no longer the cheap haven it was when we were young!

Nothing wrong with the service sector, it's the RATIO of productive to consumptive which needs correction. [Much of the service sector I consider productive BTW]

Where do you get the idea that I think service sector is unnecessary?

All the roles you describe are useful, productive service sector ones, I agree!

Having said that, there would be significant improvement in the nation's wellbeing if it could be weaned off wall to wall fast food availability, gambling in all its guises, excessive alcohol consumption.

BTW don't get the idea I'm a do-gooding religious fanatic, far from it, I like a good pint or fine wine with great food as well as anyone. I just think a little re-balancing is needed. We are becoming a nation of overweight, idle sloths with poor attitude, not to mention expectations beyond our means!

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Jeremy Bosk

Dec 07, 2012 at 18:23

Philmo

I agree about the sloth and excess hedonism. (He says, sucking in his gut :-( ).

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Philmo

Dec 08, 2012 at 00:14

Ha!

Ditto

Have a good one!

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hopalong cassidy

Dec 09, 2012 at 10:11

The cost of war? A merry Christmas to all our readers.

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John Osborne

Dec 09, 2012 at 10:18

I would add the following points:-

Many of Britains external debt problems contributing to the present crisis are self inflicted by poor government policies of both colour.

Selling off most our Utilities wherever possible and allowing foreign control has been a very short-sighted policy by politcians mostly concerned with their own ratings rather than our economic health. Talk about pawning the family silver, even worse than Gordon's gold. The Germans French Arabs and others have piled in, not believing their luck in getting an easy secure monopoly-regulated stream of payments.

The same politicians have not done nearly enough to support protect and encourage our industry. Only now are they being forced to do something, but Company Law still has not been changed to protect Companies like Cadbury's from short-term hedge funds and predatory activity from Kraft.

Using the argument that foreign "investment" should be encouraged as an expansion of "our" industry is only as good as the next factory closure, as Fords have recently demonstrated. Foreign ownership causes a dent in our balance of payments sooner or later.

Governments should show leadership in providing incentives for UK directors to keep Companies in UK ownership rather than selling out at the smallest excuse under the pretext it is in the interest of shareholders. Company Law should have been changed

a) to prevent share options enriching the directors under these circumstances , and

b) to prevent short term shareholders voting in these circumstances.

Then perhaps we might have more than a paltry 10% supporting our economy.

Finally, when Britain is bankrupt, I think "spending your way out of recession" as an argument by left-wing politicians to justify continuing their profligate vote-buying policies is morally and factually wrong, unless targeted to UK industry and infrastructure. If Keynes was alive he would probably agree that cuts in our bloated public services bureaucracy were badly needed.

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John Osborne

Dec 09, 2012 at 10:28

Jeremy,

I agree with you about Greece as a retirement location.

Unfortunately though, the single currency and resulting recessions has put paid to one of their best export earners.

Their politicians again are to blame, only being forced to subject their population to hardship because of their previous incompetence deceit and short-sightedness.

Oh for better governments.

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Philmo

Dec 09, 2012 at 11:13

But JO, the Greek politicians prime error was in leading their people to believe they could afford to lay back and enjoy soft living, just as ours have done since the days of Maggie - all in the interests of easy vote catching.

The Greeks are also guilty, as we in UK are, of allowing themselves to be suckered into a slothful lifestyle.

If you don't believe it - just consider the growth of the average waistline!

Eating and drinking has become the national pastime!

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White Stick follower

Dec 09, 2012 at 11:49

Sadly, ministers, guided by their PPS's , and so called 'advisers', can only see short term gains,and ignore the long terms losses- not least because they realise that they are unlikely to be in office when the realities catch up with them.

Its rather like government accountants who only work out the savings made by dismissing staff, whilst ignoring the costs of redundancies & benefits that will have to be paid by the State as a result. All that ministers publish are the savings.

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John Osborne

Dec 09, 2012 at 12:13

Philmo, Agree with you about the politicians, our fat standard of living of the early 2000s was based on an illusion of property values borrowed wealth and selling off assets. Have they really been acting in the national interest?

However, despite the decrease in living standards since 2007 we are yet to experience the full fallout which so far has been put off by money printing.

The first stage will be when UK loses its credit rating and interest rates start going up with all the ramifications.

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john_r

Dec 09, 2012 at 15:29

What a refreshing discussion by all. Thank you.

Who knows? We might all meet in the soup kitchens after it all comes crashing down.

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