Britain’s efforts to cut the budget deficit are “standing still” and the pound could come under pressure if investors lose confidence in the fiscal plans and the economic recovery, Fitch Ratings Managing Director David Riley said.
“It’s a very serious situation that the U.K. finds itself in,” Riley told Maryam Nemazee on Bloomberg Television’s “The Pulse” in London today. “The budget deficit for this year is going to be in excess of 8 percent, which, actually despite all of the talk of austerity, actually means the U.K. is now standing still in terms of deficit reduction.”
Fitch, which has Britain’s AAA credit rating on negative outlook, said on Sept. 28 the country faces an increased risk of a downgrade, citing the potential for government debt to peak at a higher level and later than it previously predicted. Riley said the ratings company expects to make a decision on the top grade by early 2014 and that the U.K. faces a currency risk too.
“One can’t completely discount the idea that sterling could come under significant pressure,” Riley said. “What you could get is a sterling crisis, rather than a bond market crisis. That could arise as a result of a loss of confidence in both the government’s program and also prospects for the U.K. economy in terms of a broader recovery.”
The assessment adds pressure on Chancellor of the Exchequer George Osborne as the economy struggles to recover from three quarters of contraction. Fitch forecasts that the economy will shrink 0.3 percent this year.
The ratings company said last week that Osborne is set to miss his target of starting to bring down net debt in the 2015-16 fiscal year. Instead, debt will peak at 80 percent of gross domestic product that year before beginning to 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.
“We are not at all complacent about the potential for concerns over the U.K.’s creditworthiness, but underlying fundamentals in our opinion are such that it still warrants it at this point in time,” Riley said. He said those fundamentals -- the reserve currency status of sterling and the long average maturity of its debt -- should prevent a financing crisis.
“There’s no market risks we think embedded in the U.K. rating,” Riley said. “The risk of some kind of financing crisis in the U.K. is in fact very small.”