Fitch just slashed the United Kingdom’s long-term credit rating to AA+, becoming the second of the big three rating agencies to strip the country of its prized AAA-rating. Moody’s cut the UK’s rating in February, but Standard & Poor’s announced that the UK was still AAA in its books earlier this month.
We’ve heard Fitch’s concerns before:
- It forecasts that government debt will peak in 2015-2016 at 101% of GDP, restricting the government’s ability to spend its way back to economic growth.
- Fitch predicts that the country will grow at a rate of 2-2.25% for years into the future, as the country cuts back on government spending.
- Then again, the country is stable in the long term; the sterling is an international reserve currency, and the Bank of England has been willing to intervene to stimulate growth.
We’re apt to doubt the real point of credit ratings since agencies have found themselves poor predictors of financial crisis in the past. Markets recognize that. That said, some institutional investors like pension funds are required to invest a certain percentage of their assets in the highest quality debt. Since the UK has lost that AAA rating from the majority of important ratings agencies, those investors could be forced to sell off UK debt. This would cause interest rates to rise somewhat, and funding costs for both the UK government and UK corporates to increase.
Then again, plenty of other factors are at work here. It’s probable that some investors’ forced flight from UK bonds will be mitigated by interest from other investors.
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