The U.K. may avoid a downgrade, even as subdued growth prospects make it harder for Britain to achieve its fiscal targets, according to Standard & Poor’s.
The rating company’s decision to lower the outlook on U.K. debt to negative from stable doesn’t mean there’s an immediate threat to the country’s top AAA rating, Moritz Kraemer, head of sovereign ratings in Frankfurt, said today in a Bloomberg Television interview. S&P revised the outlook yesterday, citing weak economic growth and a worsening debt profile. That means there’s a one-in-three chance that S&P will cut the rating in the next two years, Kraemer said.
“This is not a credit-watch situation where we have to act quickly,” Kraemer said on “The Pulse” with Guy Johnson. “If we had an opinion that the downgrade is a foregone conclusion we would have done it this week. But we just tried to signal that risk is to the downside and there’s no immediate action to be expected.”
The company forecast yesterday that Britain’s ratio of debt to gross domestic product will keep rising in 2015 and peak that year at 92 percent. There’s a risk it could approach 100 percent if the economic recovery is weaker than currently projected, S&P said.
Credit-rating cuts don’t always signal that bond prices will fall. French 10-year yields have dropped more than 100 basis points, or 1 percentage point, this year despite the country losing its top rating with S&P and Moody’s.
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.