U.K. AAA Rating Now Faces Greater Downgrade Risk, Fitch Says

The U.K. faces an increased risk of a downgrade to its top credit rating after Fitch Ratings said that government debt will peak at a higher level and later than it previously predicted.

Fitch affirmed Britain’s AAA level and kept the nation on negative outlook, according to a statement released late yesterday in London. The ratings company said it doesn’t expect to resolve the question mark hanging over the top grade until 2014.

“The negative outlook on the U.K. rating reflects the very limited fiscal space, at the ‘AAA’ level, to absorb further adverse economic shocks in light of the U.K.’s elevated debt levels and uncertain growth outlook,” Fitch said in the statement. “Weaker than expected growth and fiscal outturns in 2012 have increased pressure on the U.K.’s AAA rating.”

The assessment came a week after Britain posted its biggest August budget deficit on record and adds pressure on Chancellor of the Exchequer George Osborne as the economy struggles to recover from three quarters of contraction. Fitch cut its forecast for economic growth this year to show it will shrink 0.3 percent instead of expanding by 0.8 percent.

``They are reaffirming our AAA rating," Steve Field, Prime MinisterDavid Cameron's spokesman, said in an interview in Brasilia where the premier is visiting. "That reconfirms our commitment to tackle the deficit."

The pound slid 0.5 percent to $1.6157 yesterday in London. Fitch, Moody’s Investors Service and Standard & Poor’s all give the U.K. their top grade, though only S&P assesses the country’s credit rating as stable.

Osborne’s Target

Fitch said Osborne is set to miss his target of starting to bring down net debt in the 2015-16 fiscal year. Instead, it will peak at 80 percent of gross domestic product in that year before showing a decline in the following year. In the March budget, the Office for Budget Responsibility predicted debt would peak at 76.3 percent of GDP in 2014-15.

General government gross debt will peak at 97 percent of GDP in 2015-16, up from a previous estimate of 94 percent, Fitch said.

“With a structural budget deficit second in size within the AAA category only to the U.S. and GGGD approaching 100 percent of GDP” which is “the upper limit of the level consistent with the U.K. retaining its AAA status -- the likelihood of a rating downgrade has increased,” Fitch 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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