Thursday May 21, 04:41 PM
S&P issues warning on UK economy credit rating
LONDON (AFP) - Standard and Poor's warned Thursday that the British economy's top-level 'AAA (Xetra: 722800 - news) ' credit rating was under threat and revised down its outlook due to soaring public debt, sending financial markets reeling.
The international ratings agency said it downgraded the outlook to "negative" from "stable" because of the country's "deteriorating public finances" amid a deep recession in Britain and elsewhere.
S&P also warned in a statement that the change may lead to a downgrade of Britain's cherished 'AAA' sovereign credit rating -- a mark of its financial standing in the world and a major concern in any move to raise funds.
"This is the first major country to get a negative outlook, and that's significant," said Bilal Hafeez, global head of currencies research at Deutsche Bank (Xetra: 514000 - news) in London.
In reaction to the news, London's FTSE 100 index of leading shares dived by more than 3.0 percent in late afternoon trade.
And on the foreign exchange market, the British pound fell back sharply to 1.55 to the dollar, as traders hedged themselves against the chance of a damaging ratings downgrade.
"The S&P decision to revise its outlook from stable to negative has resulted in sharp outflows of sterling while traders very quickly dumped equities," said ETX Capital senior trader Manoj Ladwa.
"All this may be a storm in a tea cup as the long-term 'AAA' rating has been maintained, but this is certainly a shot across the bows."
S&P held its sovereign credit ratings for Britain at 'AAA' long-term and 'A-1+' short-term. Both ratings signify the highest confidence that Britain will repay its borrowings.
However, the agency also forecast that the government debt burden could reach nearly 100 percent of Gross Domestic Product (GDP) by 2013.
"A government debt burden of that level, if sustained, would in Standard & Poor's view be incompatible with an 'AAA' rating," warned the agency.
Official data released Thursday showed Britain's public deficit ballooned to a record 8.5 billion pounds (9.6 billion euros, 13.22 billion dollars) in April as the government bailed out banks and the recession slashed tax revenues.
At the same time, public debt as a proportion of GDP surged to 53.2 percent in April, compared with 42.9 percent at the end of the same month last year.
S&P warned that the ratings could be downgraded following Britain's next general election that must be held by mid-2010.
"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," S&P credit analyst David Beers said.
"Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing."
A spokesman for the British Treasury said the government was planning to halve the public deficit within five years.
A downgrade of a credit rating can have significant consequences for a country, pushing up the interest rates demanded by investors to buy new debt which is increasingly being issued to help cover soaring budget deficits.
Britain's economy is shrinking at its fastest pace in almost 30 years. GDP contracted by 1.9 percent during the first three months of 2009 after a slump of 1.6 percent in the last quarter of 2008.
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