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Tuesday, March 30, 2010

Britain's Credit Risk

Britain's credit rating could be lowered if a new government fails to cut massive public debt, Standard & Poor's warned on Monday as rival parties traded barbs over strained public finances.
With polls widely expected in early May, S&P affirmed Britain's top-grade AAA rating but said it remained on "negative outlook," meaning the rating could be lowered -- a move that would cause shockwaves in the global economy.
"The outlook on the United Kingdom remains negative based on our view that ... the UK's net general government debt burden may approach a level incompatible with a 'AAA' rating," S&P warned in a statement.
S&P said "the rating could be lowered if we conclude that the incoming government's fiscal strategy is unlikely to put the UK debt burden on a secure downward trajectory over the medium term."
The ruling Labour Party and opposition Conservatives have made the public finances a key battle ground in the run-up to the general election, which is widely expected to be held on May 6.
The government says it has had to spend massively in order to keep the economy on track during the worst global slump in decades.
Any move now by the Conservatives to withdraw some of the spending so as to balance the state's books will only undermine what is a still tentative economic recovery, Prime Minister Gordon Brown and his cabinet have argued.
The Conservatives in turn insist that a massive and growing budget deficit alongside soaring national debt endangers the longer-term future of the country and something must be done -- for example through budget cuts.
Analysts at Schroders, a London-based asset management company, said in a report that Britain was in for "a rocky ride" on financial markets in the coming months and that its bonds and the pound could become targets.
"Now that a solution has been announced for Greece, bond vigilantes will be taking stock and looking for their next target," Schroders said, referring to proposed EU-IMF loans to help Greece through a public finances crunch.
"As we approach the general election and the probability of a hung parliament rises, (bond market) vigilantes may find the allure of a vulnerable UK too tempting," it said.
"We expect increased volatility in Sterling and Gilt (bond) markets in the short-term," it added.
Michael Hewson, an analyst at online trading company CMC Markets, said that "the prospect of a hung parliament continues to be the over-riding concern for investors right now and this will continue to weigh."
A hung parliament is one in which no single party has a majority, meaning a coalition or minority government.
Earlier on Monday, the Conservatives pledged to scrap a planned extra levy on personal income, saying it was "a tax on jobs and the middle classes."
The planned rise in National Insurance contributions was "the economics of the madhouse," said George Osborne, shadow finance minister, pledging that the Conservatives would cover the cost by cutting six billion pounds of "waste" from the public sector.
S&P forecast that general government debt will rise to 77 percent of gross domestic product (GDP) in 2010 and approach 100 percent by 2014 -- far higher than official forecasts -- because of weak growth and a huge deficit.
The government forecasts debt to peak at 89.2 percent of GDP in 2013-2014.
"As a result of the sizeable structural general government deficit, together with our weaker economic outlook, we project the general government gross and net debt burdens to continue on an upward trend," it added.
The ratings agency also said that the budget announced last week did not make any clearer how the government planned to deal with the debt in the medium-term, adding that there was "substantial uncertainty" over policy.

David Mikael Taclino
Inyu Web Development and Design
Creative Writer

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