Osborne Says Credit Rating Is ‘One Test’ as S&P Cuts Outlook
Chancellor of the Exchequer George Osborne played down the importance of Britain’s top credit rating, saying it is only one gauge of the economy’s health.
Osborne made his comments to lawmakers today hours before Standard & Poor’s lowered its outlook on the U.K. to negative from stable, citing weak economic growth and a worsening debt profile.
“It’s one test alongside others and the ultimate test is what you can borrow money at,” Osborne told Parliament’s Treasury Committee in London today. “The test we have is one we have to meet every week when we go and try and sell our gilts.”
S&P said there is a one-in-three chance it will cut its AAA rating in the next two years. The move comes a week after Osborne conceded in his autumn statement that he is no longer on course to begin cutting the burden of government debt in 2015. Fitch Ratings said last week that letting the debt target slip weakened the fiscal credibility underpinning the top rating.
Osborne said today that markets took the news that he’d miss his debt target in stride because he had demonstrated a commitment to tackling the budget deficit. Ten-year U.K. government bonds currently pay 1.86 percent, a third of the rate on equivalent Spanish debt.
“I am not going to speculate about the future decisions of rating agencies,” Osborne said. “My job is to maintain credibility. What I see in the current environment, with a lot of problems elsewhere in the European continent, is that the U.K. is something of a safe haven.”
Osborne staked his political reputation on maintaining Britain’s credit rating when in 2010 he embarked on the biggest austerity program in more than half a century to cut the budget deficit.
S&P said it could strip Britain of its top rating if the country’s economic and fiscal performance weakens more than it expects. “We expect economic growth to accelerate slowly, but the risks to our growth assumptions are weighted to the downside, however, with associated risks to government finances,” it said.
It forecast that the U.K.’s ratio of debt to gross domestic product will continue to rise in 2015 and peak that year at 92 percent, with a risk that it could approach 100 percent.
Credit-rating downgrades, far from being a signal that bond prices will fall, often offer investors buying opportunities. French 10-year yields have fallen this year despite the country losing its top rating with Standard & Poor’s in January and with Moody’s Investors Service last month.
The U.S., meanwhile, has been deemed more creditworthy by investors since S&P stripped the nation of its AAA grade in 2011, with 10-year note yields dropping to a record low this year.
About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974.
Britain has a top rating at S&P, Fitch and Moody’s Investors Service. Fitch and Moody’s already have the U.K. on a negative outlook.
In a statement, the Treasury said S&P endorses the government’s “strong commitment to implementing the fiscal mandate” and specifically warns against slowing “the pace and extent of fiscal consolidation.”
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