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Britain no longer a AAA nation? It could happen, S&P warns

May 21, 2009 | 10:53 am

Britain was put on notice today that it could lose its AAA credit rating because of massive government borrowing, a warning that ought to at least prick up the ears of U.S. policymakers.

Standard & Poor’s cut its credit outlook for the United Kingdom to "negative" from "stable" and said there was a one in three chance that the country’s AAA rating could be reduced.

From Bloomberg News:

"We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of gross domestic product and remain near that level in the medium term," S&P analysts led by David Beers in London said in the report.

Bigben "The downgrade highlights the precarious fiscal outlook the U.K. economy faces," said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets. "The huge amount of issuance to face the [bond] market in the coming months will push yields to the upside. We’re bearish."

Like the U.S., Britain is borrowing heavily to rescue its economy from a deep recession. Britain’s debt load next year will be 66.9% of gross domestic product, Bloomberg said, citing forecasts from the International Monetary Fund. That would exceed Canada’s 29.1% and Germany’s 58.1%. The U.S. will be at 70.4%, and the 16-nation euro area at 69%, according to the IMF.

S&P is concerned about the longer-term outlook for Britain’s debt load. But S&P's two main rivals, Moody’s Investors Service and Fitch Ratings, today reaffirmed the country’s AAA status and said their rating outlooks remained stable, Reuters reported.

Currency traders didn't seem too rattled, either: The British pound briefly tumbled after S&P’s report but quickly recouped its losses. It’s trading around $1.585 in New York, up from $1.576 on Wednesday.

Spain and Ireland had their AAA ratings cut by S&P this year. And S&P last September warned that the U.S. could jeopardize its top rating amid mounting bailouts -- and that was just as the financial-system meltdown was in its early phase.

"There's no God-given gift of a 'AAA' rating, and the U.S. has to earn it like everyone else," the chairman of S&P's sovereign ratings committee told Reuters back then.

-- Tom Petruno

Photo: Big Ben. Credit: Peter Macdiarmid / Getty Images

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