U.K.’s Top Credit Grade Cut by Fitch on Economy, Fiscal Outlook

Britain lost its top credit grade at Fitch Ratings, which cited a weaker economic and fiscal outlook as it became the second company to cut the country’s rating within two months.

Fitch lowered the U.K. to AA+ from AAA with a stable outlook, it said in a statement in London today. It cut its growth projection and forecast that debt would peak at 101 percent of gross domestic product in the fiscal year 2015-2016.

“Despite the U.K.’s strong fiscal financing flexibility underpinned by its own currency with reserve-currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with an AAA rating,” Fitch said.

The decision may prove a further blow to Chancellor of the Exchequer George Osborne after the International Monetary Fund said this week he should rethink the scale of budget cuts. Fitch had put Britain on negative watch on March 22, two days after Osborne cut his growth forecasts in his annual budget and said it will take longer than previously expected to lower debt.

Standard & Poor’s said on April 5 that it would keep the U.K. on the top AAA rating. Moody’s Investors Service took Britain’s rating down to Aa1 from Aaa on Feb. 22, citing the economic outlook and challenges to the fiscal program. Investors often ignore such moves, evidenced by a drop in gilt yields since that downgrade.

“Despite the loss of its AAA status, the U.K.’s extremely strong credit profile is reflected in its AA+ rating and the stable outlook,” Fitch said.

Recession Concern

The pound extended a decline against the dollar after the Fitch statement. It was trading at $1.5235 as of 5:34 p.m. London time. The 10-year gilt yield was at 1.66 percent.

Data on April 25 will show whether Britain fell into its first ever triple-dip recession. The median forecast in a Bloomberg News survey is for gross domestic product to have risen 0.1 percent in the first quarter.

“The short-term picture is that the deficit reduction process has stalled, and the medium-term picture is definitely worse,” said Ross Walker, an economist in Royal Bank of Scotland Group Plc in London. Fitch’s move “is not helpful to Osborne. There’s a bit more pressure on the chancellor, but are we going to meaningfully change policy? No.”

The independent Office for Budget Responsibility cut its 2013 growth projection to 0.6 percent from 1.2 percent last month. The OBR also expects net debt to begin falling in 2017-18, a year later than previously planned. It’s the second time the debt target has slipped.

Investors often disregard changes in ratings. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December.

Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by Standard and Poor’s. That’s more than the longer-term average of 47 percent, based on more than 300 changes since 1974.

To contact the reporters on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net; Scott Hamilton in London at shamilton8@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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