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How the UK can save its AAA credit rating

There's a 50% chance of the UK being downgraded by the end of the year, but there's still time to turn it around, argues M&G's Jim Leaviss.

 
How the UK can save its AAA credit rating

Jim Leaviss, fund manager at M&G, believes there is a 50% chance the UK will be downgraded before the year is out, but he said the country still has a chance to salvage its coveted AAA rating.

Concerns over the UK’s credit rating mounted after GDP for the second quarter was revealed to be worse than expected, down 0.7%.

The weak growth figure comes after ratings agency Moody’s put the UK on negative outlook earlier in the year, and after a host of analysts called on the Bank of England to act or else watch Britain's outlook deteriorate further.

Tax recipts in decline

Leaviss (pictured), who manages the M&G Gilt & Fixed Interest Income and M&G UK Inflation Linked Corporate Bond funds, said that because growth is so weak tax receipts are dropping by around 7% year on year, and the fiscal position of the country is deteriorating.

‘The ratings agencies have said they are on a watching brief to see if we can continue to collect our taxes and get borrowing down,’ said Leaviss, speaking exclusively to Citywire. He said rather than austerity, the ratings agencies want to see more tax revenues relative to spending.

‘So if the UK is on a negative outlook, the ratings agency would be concerned there doesn’t appear to be any plan,’ Leaviss explained.

The manager said the UK needs to have a plan to show the economy can achieve growth in the years ahead. ‘We wouldn't get downgraded if we loosened the purse strings. As long as the ratings agencies can see a plan [it will keep the rating]. But we don’t have a plan. So there’s more than a 50% chance we are downgraded by the end of the year.’

How to save our AAA rating

Leaviss said the government could have a strategy whereby it says ‘2013 and 2014 are not going to be about austerity’ and ‘the goal now is to generate growth and stop a loss of output’.

‘The ratings agencies need to be told debt to GDP and sorting out the deficit are important, but the next two years we’ll do investment in the economy to boost long-term growth, through investing in infrastructure and home-building. We also have record low interest rates, so we can borrow.’

He said interest rates could also be cut to 0%, although this would not be a ‘silver bullet’.

‘The central bank... six months ago, they wouldn't entertain the idea of a rate cut. They said it would cause dislocations in the money markets,’ Leaviss said. ‘But now a rate cut is back on the agenda. It won’t change the world, but it will at least feed through to people on floating-rate mortgages, for example.’

5 comments so far. Why not have your say?

Jon

Jul 26, 2012 at 18:26

"Growth" is not about spending other people's money - Brown thought it was. The GDP is bound to fall as people and governments repay their debts just as it went artificially high during the credit boom. What matters most is our balance of payments. If austerity is curbing the imports of consumer goods then so be it.

What Leavies is suggesting will undoubtedly cause Sterling to fall, increase inflation and erode the value of savings even more.

Why is it that these dumpties think that there is any easy way out of the mess ? And having put the hand in the fire, who would recommend putting it back in ?

There may be a case for more infrastructure spending PROVIDED it can be undeniably shown to generate a positive return and not lead to an increase in net imports.

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David Rowse

Jul 26, 2012 at 20:09

Jon

How terribly unkind and thoughtless to suggest that 'chums' would ever get other chums into difficulties with the 'head' - whoever that might be these days??

We chums must stick together and my advice to Ozzie is that if he is in for a beating he should shove his Latin primer down the back of his pants.

Golly gosh, if we chums can't stick together what on earth is the world coming to?

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Smithy

Jul 27, 2012 at 11:27

Ozzie has a plan – plan A. Unfortunately this is based on one main thrust, austerity (OK it is a bit more complex than that). If austerity by itself was the answer, someone would have figured that out by now. Likewise for printing money and buying up bonds (QE), or spending to generate growth (hang on, that’s how Brown and Balls got us into this mess).

A little austerity is good, but a lot can be disastrous – witness Greece. I’m sure the same can be said of QE or Spending. Therefore Plan B should include a little bit of everything:

Austerity to cut costs where it makes sense; cutting expenditure where the minimum number of jobs are lost. Redeploying money away from areas of low productivity (such as quangos) and into areas where it can be better used (such as HMRC, the only government department that really earns money).

QE to keep the interest rates low; all this QE just gets sucked up into the top of the food-chain and does not really circulate, so it should be limited.

Investing in projects that will keep workers employed. Unemployed workers go onto benefits and thereby become a non-productive cost to the country – just about any employment will be more cost-effective. Workers then spend their money so it enters circulation, unlike QE.

The bottom line is that we have lived beyond our means for many years and then we had to bail out the banks (what a pity we could not just leave them to go bust – not an option, unfortunately). It is now payback time. We are going to have to tighten our belts for many, many years to come.

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Tongue of Fire

Jul 27, 2012 at 11:29

The French State has massaged its balance sheet by transforming the previously ringfenced insurance social security deficit which it in fact guaranteed into a tax recoverable deficit, subsidised now by foreigners with French assets and income. Cunning and subtle these French. First Steps in Latin could be bulwarked by a French textbook as well. I always found it a good idea to double up on the textbook protection, personally, if it does not appear too bulky. The head can then be easily distracted by attempting to read the one he removes. Good Egg!

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peter hart

Jul 28, 2012 at 09:43

For Ozzie

See the happy moron

He doesn't give a damn

I wish I were a moron

Oh god perhaps I am.

Could apply to Mark too.

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