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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.
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.’
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by Dumb Investor on Dec 11, 2013 at 09:00