U.K. AAA Credit-Rating Loss Not ‘Imminent,’ LSE’s Davies Says

Britain isn’t about to lose its AAA credit rating, and spending cuts to be announced today will show the new government’s resolve to tackle the budget deficit, former Bank of England Deputy Governor Howard Davies said.

A loss of the top rating “would be serious in terms of the cost of our debt in the long run,” Davies, director of the London School of Economics and former chairman of the Financial Services Authority, said in a Bloomberg Television interview in London today. “I don’t think that’s imminent.”

Chancellor of the Exchequer George Osborne said today he has found 6.2 billion pounds ($9 billion) of government spending cuts to reduce the country’s record deficit. The two-week-old coalition government of the Conservatives and Liberal Democrats will set out broader plans in an emergency budget on June 22.

“This isn’t really a serious announcement in terms of the scale of the problem,” Davies said. “But it’s a sign to the markets that he does have agreement within the coalition to do nasty things.”

The U.K. deficit reached 11.1 percent of gross domestic product in the past fiscal year, the most since World War Two. Davies said the U.K. wasn’t in the same position as Greece, which triggered a crisis in the euro area by building up a deficit of 13.6 percent of GDP.

“The gilt market has been reasonably stable,” he said. “The government has been able to sell its debt.”

The yield on the U.K. 10-year bond has fallen 0.5 percentage point this year and was unchanged at 3.55 percent today at 8:58 a.m. in London. The 10-year Greek bond yield rose as much as 6.8 percentage points this year before the government bailout was put in place, and traded at 7.8 percent today.

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