Britain's credit rating may yet survive
By Matt Falloon and Sven Egenter, Reuters
February 16, 2012, 12:00 am TWN
Britain, which has already had to give up on balancing the books by the time of the next election in 2015, is aiming for a budget deficit of 8.4 percent of national economic output in the 2011-12 fiscal year, falling to 7.6 percent in 2012-13, still much higher than those forecast for France or the United States.
The risks to those predictions are considerable, in particular if the economy fails to recover this year and next.
Vicky Redwood from Capital Economics predicts 10 billion pounds of extra borrowing in the 2012/2013 fiscal year on top of the government's forecast of 120 billion as she sees the economy contracting by 0.5 percent this year.
A more dramatic shock such as a euro zone break up would send Britain's debt spiraling.
There are several crucial factors why Britain is seen as safer than most. The average maturity of its debt — which dictates when the government has to reimburse investors — is 14 years, much longer than many nations, according to the Britain's Debt Management Office (DMO), giving it more breathing space.
And the central bank has just embarked on another 50-billion-pound round of quantitative easing purchases. “The Bank of England is still there as the buyer of last resort and it is still buying more gilts than the DMO is issuing,” said Monument Securities strategist Marc Ostwald.
Moody's itself noted the Bank of England's key role in safeguarding investors' trust as well as the limited risk of not finding buyers for its debt.
“The UK has the lowest refinancing risk of all the large AAA economies, based on the average maturity of the UK's debt stock ... its large domestic investor base, and the willingness and ability of its central bank to undertake accommodative monetary policy,” Moody's said.
Finance minister Osborne, committed to slashing spending by about a fifth across government departments before the next election in 2015, faces the increasingly tough task of pushing through cuts while steering Britain away from a slump.