Fitch Downgrades Britain. No One Cares.
Fitch Ratings announced today that it is cutting the U.K.'s credit rating from AAA to AA+, the second-highest level, because of its weak economic performance and high public debt. This follows a similar move by Moody's in February, and it doesn't matter.
As Svenja O'Donnell and Scott Hamilton note in reporting on the downgrade for Bloomberg, "Investors often ignore such moves," and U.K. sovereign bond yields fell after the Moody's downgrade. Investors are similarly blase today: Credit-default swap prices for the U.K. have barely moved. As of 2:05 p.m. in New York, U.K. five-year CDS are trading at $47.01, up all of 11 cents today. (That's a price to insure $10,000 in bonds against five years of losses.)
That means that, despite the warnings from Fitch and Moody's, investors still consider U.K. bonds to be less risky than they were in February and far less risky than they were last summer, when all three rating agencies were giving the country their top rating (see chart).
The U.K. government is not some regional water district. Rating agencies aren't telling investors anything they don't already know when they report that the U.K. has high debts and weak growth. Investors have (properly) judged that U.K. bonds are extremely low-risk instruments despite those troubles, and it's no surprise the Fitch announcement hasn't changed their minds.
That won't stop opponents of the U.K. coalition government's austerity policies from saying that today's action proves them right -- any more than it stopped advocates of austerity in the U.S. from claiming vindication after the Standard & Poor's downgrade on this side of the Atlantic. But now, as then, the rating doesn't matter.
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