Q&A: Why is George Osborne so afraid of a downgrade?

Can the government do what it takes to prevent a Greek style debt crisis in the UK?

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by Deborah Hyde on May 29, 2010 at 00:01

Q&A: Why is George Osborne so afraid of a downgrade?

Chancellor George Osborne has said over and over again that the government's number one priority is to get the country's debt back down to more manageable levels and to avoid a credit rating downgrade.

Why does it matter?

Government debt has been soaring.

At £156.1 billion the gap between income and what the government spent this year is higher than in almost any other country in the world - including the southern European countries that sparked recent market worries.

Total government debt - at £893.4bn is around 62% of GDP and is widely expected to climb - possibly close to 100%.

More government money is spent on interest payments each year than is paid on the NHS or on the police.

With tax receipts falling and the cost of welfare rising, the recession has made it increasingly difficult for the UK to balance its books.

Anyone in debt knows there is a level at which the cost of borrowing rises so high that it becomes almost impossible to bring borrowing back down.

A key factor in that is how risky your creditors think you are, who is willing to lend to you and at what interest rate.

As is the case with us all, a government's credit score (rating) is key.

The UK currently has the best score it is possible to have - AAA.

Is a downgrade likely?

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4 comments so far. Why not have your say?

You have to remember that firms like Standard & Poor's are just private companies. So you then have to ask yourself "who pays them for their rating?". It is often governments who can influence their ratings. So it really doesn't matter what Standard & Poor's rating of the UK is, traders in the know will come to their own opinion and that is what will influence the market.

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Further to Jonathan's comment, I think it is also worth remembering that people like S&P totally failed to see the first wave of this debt crisis coming.

So I wouldn't put too much weight on what they do or don't say.

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Quite right Jonathon, but who ultimately benefits from a European downgrade?, and where do the three main rating agencies reside?

I feel we need a European perspective regarding rating agencies, to avoid "seperate agenda scenarios".

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timothy burton

Jun 01, 2010 at 10:01

Further to Peter's comment, the ratings agencies, in the lead up to the 2008 crisis, were guilty (in their own words) of "drinking the cool aid" ie they were swept up in the madness that periodically affects markets which have enjoyed long periods of growth, and rated everything in sight "because the other two were doing so as well". The shellacking they received from the Senate investigation, and the new realism of the times, will ensure that they apply strict criteria to the ratings of companies and countries; an adverse rating on the UK could cause a vicious circle. Osborne is correct to try and head this off with all the energy he can.

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