U.K. Credit Rating Affirmed by S&P as Outlook Remains Negative

Britain retained its top AAA credit rating at Standard & Poor’s, which said the government has the capacity to meet its fiscal challenges, though the outlook for the grade remains negative.

“We believe that the government will implement its fiscal mandate and that it has the ability and willingness to respond rapidly to economic challenges,” S&P said in a statement in London yesterday. The negative outlook means “at least a one-in-three chance” of a downgrade if economic and fiscal performances were to weaken beyond current expectations.

The affirmation comes after Chancellor of the Exchequer George Osborne’s March 20 budget, when he announced a cut in the growth forecast and said it will take longer than previously expected to lower the nation’s debt. Moody’s Investors Service stripped Britain of its top grade in February, and Fitch Ratings put the nation on “watch negative” two days after the budget.

The independent Office for Budget Responsibility cut its 2013 growth projection to 0.6 percent from 1.2 percent on March 20. 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.

S&P put the U.K.’s rating on a negative outlook in December, a week after Osborne delivered his autumn statement, when he first pushed back his debt time frame.

Gilts Rise

Fitch said on March 22 that its decision to put the U.K.’s AAA rating on watch negative indicates a “heightened probability of a downgrade in the near term.” It plans to complete its review of the grade by the end of this month.

Investors often ignore rating and outlook changes. Gilts have advanced since Moody’s cut Britain’s rating to Aa1 from Aaa on Feb. 22. U.K. government bonds rose yesterday, with the 10-year yield falling to 1.63 percent, the lowest since September.

In its statement yesterday, S&P said that the Bank of England’s accommodative policy stance should help to keep the pound “competitive.” Sterling has fallen about 5.7 percent against the dollar and 4.7 percent versus the euro this year. It’s the second worst performer after the yen in 2013, based on Bloomberg Correlation-Weighted Indices.

The ratings company also said the U.K. government has been taking measures to stimulate credit, though it doesn’t expect these to have a “substantial impact on net lending.”

It forecast that the economy will grow an average 1.6 percent a year from 2013 to 2016, based on the impact of the government fiscal plans. Governance issues won’t “materially diminish” London’s position as the “pre-eminent” financial center in the European Union, it said.

The U.K. Treasury in London responded to the S&P statement, saying it was a “reminder that our country cannot afford to simply run away from our problems.”

“Though it is taking time, we are slowly but surely fixing this country’s economic problems,” it said.

S&P said its view on the U.K. is predicated on the country remaining a member of the EU.

“Our baseline assumption is that business investment will not be affected by uncertainty regarding the outcome of a possible referendum on EU membership,” it said.

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