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U.K. Watchdog Says Markets Would Take AAA-Rating Loss in Stride

Any loss of Britain’s top credit rating would have little impact on financial markets because investors would have already factored in the reasons for a downgrade, the government’s fiscal watchdog said.

“We have seen other countries suffer that and it’s not had a noticeable impact on market views,” Robert Chote, director of the Office for Budget Responsibility, told Parliament’s Treasury Committee in London today.

In the case of the U.K., ratings don’t provide a good guide to the likelihood of a default because they fail to take account of the fact that the country can “basically print its own currency,” Chote said during testimony on Chancellor of the Exchequer George Osborne’s autumn statement last week.

Osborne conceded he is no longer on course to begin cutting the burden of government debt in 2015, prompting Fitch Ratings to warn that that missing the target “weakens the credibility of the U.K.’s fiscal framework, which is one of the factors supporting” the country’s AAA rating.

The chancellor staked his political reputation on maintaining Britain’s top credit score after mapping out the biggest austerity program in more than half a century in 2010 to win the confidence of investors.

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.

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