Bloomberg News

Pound Falls After Fitch Says U.K. at Risk of Losing AAA Rating

March 15, 2012

The pound fell for the first time in three days against the euro after Fitch Ratings said the U.K. risks losing its top investment grade, sapping demand for Britain’s currency.

Sterling weakened against 11 of its 16 major peers as Fitch changed its outlook for Britain to negative from stable, indicating a “slightly greater” than 50 percent chance the nation will lose its AAA grade within two years. Longer-dated bonds underperformed two-year gilts as the debt agency sold 2 billion pounds ($3.13 billion) of December 2042 securities.

“The Fitch announcement did take some of the shine off the pound,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “It’s a reminder to the market that if the austerity measures don’t stay in place there could be a downgrade.”

The pound declined 0.4 percent to 83.37 pence per euro at 4:11 p.m. in London after appreciating to 82.95 yesterday, the strongest since Feb. 17. The U.K. currency was little changed at $1.5683, and slid 0.4 percent to 130.73 yen.

Chancellor of the Exchequer George Osborne, who is implementing the biggest squeeze on government spending since World War II, is scheduled to present his budget on March 21. Moody’s Investors Service said last month that Britain may lose its AAA rating should the economy deteriorate. That assessment was “perfectly reasonable,” Bank of England Governor Mervyn King said on Feb. 29.

Spreads Widen

The yield on the 30-year gilt climbed two basis points to 3.42 percent. Two-year yields fell seven basis points to 0.44 percent after reaching 0.57 percent.

That left the yield spread between the securities at 297 basis points, the most since Oct. 1. The difference in yield between the two- and 10-year securities was at 1.91 percentage points, the most since Dec. 5.

Longer-dated gilts declined as Bank of England policy maker Ben Broadbent said easing bank funding conditions and an improvement in credit supply could warrant tighter policy.

The Bank of England’s Monetary Policy Committee raised the target for bond purchases by 50 billion pounds to 325 billion pounds last month while keeping its benchmark interest rate at a record low 0.5 percent. The U.K. economy shrank 0.2 percent in the fourth quarter.

“Any abatement in overseas risks, which now reside more in the euro zone than in the U.S. housing market, would have favorable effects on the funding costs of British banks and on the supply of credit to the domestic economy,” he said in a speech in London today. This “could warrant a withdrawal of monetary accommodation by the MPC even if domestic debt-income ratios remain well above some notional historical norm.”

Gilts have lost 2.6 percent this year, compared with a 0.7 percent decline by German bunds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries lost 1.7 percent, the indexes show.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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