Britain’s top credit rating is “secure for now” and the country should avoid the fate of the euro area, where nine member states were downgraded by Standard & Poor’s last week, Citigroup Inc. said.
“To be sure, the U.K. suffers from some of the adverse factors cited by S&P to justify the euro-area downgrades,” London-based Citigroup analysts Michael Saunders and Mark Schofield said in a note to clients today. “Nevertheless, in other respects, we think the U.K.’s ability to return to fiscal sustainability is significantly better than most” euro-region governments.
Germany was left with the euro area’s only stable AAA rating at S&P after the ratings company cut nine sovereigns on Jan. 13. Citigroup said the U.K. will retain its rating and “not be placed on negative watch or negative outlook” because of the government’s commitment to reducing the budget deficit and the nation’s flexible monetary policy.
Citigroup also said the U.K. faces less risk of having to support euro-area countries and banks ensnared in the region’s debt crisis. At the same time, the British government’s proposals to protect U.K. lenders’ consumer units will limit its liabilities to backstop them against other losses.
“Nevertheless, of course, the U.K.’s AAA rating would be vulnerable if the economic outlook for 2012-13 proves far worse than we currently expect,” the analysts said, adding that the next hurdle will be Chancellor of the Exchequer George Osborne’s budget in March.
“We do not currently believe that extra fiscal tightening will be needed to keep the deficit edging down in 2012-2013, but if it proves necessary, the chancellor will probably implement it,” they said.
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