Bloomberg News

U.K. Keeps Top Rating at S&P as Debt Seen to Peak Earlier (1)

December 20, 2013

The U.K. kept its top credit rating at Standard & Poor’s, which said the country’s debt will peak sooner and lower than it had forecast because of a strengthening economy.

Britain remains at AAA with a negative outlook, S&P said today in a statement released in London. Net general government debt will reach its highest point at 89 percent of gross domestic product in 2015, one year earlier than previously predicted, the ratings company said.

Investors often ignore ratings decisions, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011. The ratings company has stood alone in maintaining the U.K. at the top level, with Moody’s Investors Service and Fitch Ratings both grading the country one step lower.

“Relative to peers, we consider the U.K. to benefit from higher-than-average fiscal flexibility, meaning that under pressure the government would be willing and able to increase tax pressure and/or cut public spending by at least 3 percent of GDP in the short term,” S&P said.

The decision is a political boost for Chancellor of the Exchequer George Osborne, who upgraded Britain’s growth and fiscal forecasts this month. It came as S&P stripped the European Union of its top rating, saying the bloc’s cohesion has weakened and its financial profile deteriorated.

Gilt Losses

The benchmark 10-year gilt yield rose two basis points, or 0.02 percentage point, to 2.98 percent as of 8:15 a.m. London time, the highest level in intraday trading since Dec. 6.

U.K. gilts lost investors 4.1 percent this year through yesterday, the most among major markets tracked by Bloomberg World Bond Indexes, as the strongest growth in three years eroded demand for fixed-income assets. Germany’s bonds fell 1.9 percent and U.S. Treasuries declined 3 percent.

Global bond yields showed investors ignored 56 percent of Moody’s Investors Service and 50 percent of S&P’s rating and outlook changes last year, more often disagreeing when the companies said governments were becoming safer or more risky, data compiled by Bloomberg show.

Britain’s improved fiscal outlook reflects lower borrowing requirements, S&P said. Its report was released before data due today on the state of the U.K.’s deficit in November.

“We now forecast public-sector borrowing needs will fall by an additional 1 percent of GDP during the 2014-2015 fiscal year, and that these savings will be repeated over the next four years, largely influenced by a stronger business cycle, the ratings company said.

S&P said that factors which could bring the U.K.’s top rating under pressure include the possibility that its analysts judge government debt more likely to peak at 100 percent of GDP.

‘‘A material weakening of the governance and institutional environment, and policy implementation capacity -- for example as a reaction to polarizing political conflict over the U.K.’s role in Europe-- could also increase downward pressure on the rating,” S&P said.

To contact the reporter on this story: Craig Stirling in London at cstirling1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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