U.K. Chancellor of the Exchequer George Osborne said he won’t give in to opposition calls to change his economic policy after Moody’s Investors Service’s decision to strip the U.K. of its Aaa status.
Osborne said the government should “stick to its course” to reduce Britain’s debt after the opposition Labour Party called on him to switch his emphasis from deficit reduction to growth, following what it called Moody’s “humiliating” decision.
Osborne was backed by former Conservative Chancellor Ken Clarke and Business Secretary Vince Cable, who downplayed the significance of the Moody’s announcement.
Osborne has repeatedly referred to retaining the top rating as a test for his economic policy and the U.K.’s political classes are sparring over the downgrade even as investors and economists say rating changes are a poor indicator of fiscal health. U.S. and French gilt yields are lower than where they were when they were downgraded over the past two years.
“Britain has a debt problem, built up over many years, and we have got to deal with it,” Osborne wrote in an article in today’s Sun newspaper.
“Far from weakening our resolve to deliver our economic recovery plan, this rating decision redoubles it.”
The U.K.’s high and rising debt burden means deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement which accompanied the downgrade announcement.
While the U.K. retains “considerable structural economic strengths,” expected slow growth of the global economy and the reduced speed of debt reduction in the country led to the decision, the company said.
Limited Impact
Still, the “downgrade is all in the price and I don’t think it came as a total surprise to the market,” Shahid Ikram, head of sovereigns and chief investment officer for the U.K. at Aviva Investors, said in a phone interview.
“The impact on gilts will be limited in the same way ratings downgrades had limited impact on the U.S. and France.”
Ed Balls, Labour’s economy spokesman, said Osborne should scale back his fiscal squeeze and refocus on growth in his budget on March 20. The U.K. economy shrank 0.3 percent in the fourth quarter of last year from the prior three-month period, leaving the country on the brink of an unprecedented triple-dip recession.
“Moody’s themselves say the main driver of their decision is the weak growth in Britain’s economy,” Balls said in a statement. “In the budget, the government must urgently take action to kick-start our flat-lining economy and realize that we need growth to get the deficit down.”
‘Bad’ Record
Osborne said in his autumn statement Dec. 5 that he’s no longer likely to meet his target to begin cutting the burden of government debt in 2015-16 after his fiscal watchdog cut its growth forecasts. Standard & Poor’s put the U.K.’s rating on a negative outlook a week later.
Britain’s debt as a percentage of gross domestic product will climb to 98 percent next year from 90 percent last year and 95.4 percent in 2013, the European Commission said in its winter forecast on Feb. 22.
Cable, a Liberal Democrat whose party is in coalition with Osborne’s Conservatives, said the rating agencies are “like tipsters” who have a “bad record,” and the change will have little impact on the economy.
“It’s largely symbolic, in terms of the real economy there is no reason why the downgrade should have any impact,” Cable said in an interview with BBC TV’s Andrew Marr show.
“Last year, the U.S. was downgraded, the economy grew strongly relative to Europe, President Obama was triumphantly re-elected. France had a downgrade last year, its interest rates that it borrows long-term in the market are only a little above ours.”
Sovereign Yields
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. “What Moody’s said is old news and it is behind the curve,” Stuart Thomson, who helps oversee $109 billion at Ignis Asset Management in Glasgow, Scotland, said in a phone interview.
“Other agencies may follow it, but at Ignis we think the U.K. economy is doing far better than Moody’s thought.”
Pound’s Decline
The pound fell after the downgrade in the last half-hour of trading in New York, dropping 0.6 percent to $1.5163. Sterling has depreciated 5.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.
“In terms of gilts, the dominant factor remains the prospect for more QE, which we think is likely,” Michael Amey, portfolio manager at Pacific Investment Management Co., said in an e-mail.
Aviva’s Ikram agreed that bond purchases by the Bank of England, where Bank of Canada Governor Mark Carney will start work in July, will have a greater impact on gilts than the downgrade.
“For us at Aviva, a more important factor to watch for gilts is the Bank of England’s bond-buying policy,” Ikram said.
“If the central bank decides to stop buying, gilt yields will have to rise further. But again, there will be investors out there, such as sovereign wealth funds, who would bid for gilts when yields are higher.”
King Pressing
Outgoing Bank of England Governor Mervyn King is pressing for more bond purchases and leading a debate on what can be done to encourage lending, boost exports and bolster the recovery, including the bank and the government working together to spur economic growth.
He voted in the Monetary Policy Committee on Feb. 7 to increase QE by 25 billion pounds ($38 billion), though was unable to convince enough of his colleagues to support him.
The yield on 10-year U.K. government bonds, or gilts, was little changed at 2.11 percent at the market close on Friday, and that was before the downgrade was announced. That compared with a record low of 1.407 percent reached on July 23 and an average of 3.945 percent in the past decade.
Moody’s cut France’s top rating on Nov. 19 by one level. S&P lowered the rating by one step to AA+ from AAA on Jan. 13, 2012. Yields on the nation’s 10-year bonds have climbed 16 basis points, or 0.16 percentage point, since the Moody’s downgrade.
The borrowing cost has declined 84 basis points since the S&P cut. Moody’s also downgraded from Aaa Ireland in 2009 and Spain in 2010.
March Budget
U.S. Treasuries rallied after S&P stripped the U.S. of its top ranking on Aug. 5, 2011, with yields touching a record low 1.379 percent in July 2012.
U.S. government debt gained 9.8 percent in 2011, the most in three years, according to Bank of America Merrill Lynch index data. Osborne will need to convince rank-and-file lawmakers in his Conservative Party that the budget he delivers on March 20 will bring growth and a boost in the polls for the party.
Lawmaker Adam Afriyie, who has been mooted as a possible replacement for Prime Minister David Cameron as party leader, used an article for the Mail on Sunday to call for massive tax cuts, while ministers publicly backed the chancellor.
“I don’t think for most people actually, that in the circumstances of 2013, this change to the credit rating comes as much of a surprise,” cabinet minister and former Chancellor Ken Clarke told Sky News.
“So long as we make it clear we’re sticking to deficit and debt reduction and that we have strong policies for growth alongside them then we’ll maintain confidence.”
bloomberg.com
Osborne said the government should “stick to its course” to reduce Britain’s debt after the opposition Labour Party called on him to switch his emphasis from deficit reduction to growth, following what it called Moody’s “humiliating” decision.
Osborne was backed by former Conservative Chancellor Ken Clarke and Business Secretary Vince Cable, who downplayed the significance of the Moody’s announcement.
Osborne has repeatedly referred to retaining the top rating as a test for his economic policy and the U.K.’s political classes are sparring over the downgrade even as investors and economists say rating changes are a poor indicator of fiscal health. U.S. and French gilt yields are lower than where they were when they were downgraded over the past two years.
“Britain has a debt problem, built up over many years, and we have got to deal with it,” Osborne wrote in an article in today’s Sun newspaper.
“Far from weakening our resolve to deliver our economic recovery plan, this rating decision redoubles it.”
The U.K.’s high and rising debt burden means deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement which accompanied the downgrade announcement.
While the U.K. retains “considerable structural economic strengths,” expected slow growth of the global economy and the reduced speed of debt reduction in the country led to the decision, the company said.
Limited Impact
Still, the “downgrade is all in the price and I don’t think it came as a total surprise to the market,” Shahid Ikram, head of sovereigns and chief investment officer for the U.K. at Aviva Investors, said in a phone interview.
“The impact on gilts will be limited in the same way ratings downgrades had limited impact on the U.S. and France.”
Ed Balls, Labour’s economy spokesman, said Osborne should scale back his fiscal squeeze and refocus on growth in his budget on March 20. The U.K. economy shrank 0.3 percent in the fourth quarter of last year from the prior three-month period, leaving the country on the brink of an unprecedented triple-dip recession.
“Moody’s themselves say the main driver of their decision is the weak growth in Britain’s economy,” Balls said in a statement. “In the budget, the government must urgently take action to kick-start our flat-lining economy and realize that we need growth to get the deficit down.”
‘Bad’ Record
Osborne said in his autumn statement Dec. 5 that he’s no longer likely to meet his target to begin cutting the burden of government debt in 2015-16 after his fiscal watchdog cut its growth forecasts. Standard & Poor’s put the U.K.’s rating on a negative outlook a week later.
Britain’s debt as a percentage of gross domestic product will climb to 98 percent next year from 90 percent last year and 95.4 percent in 2013, the European Commission said in its winter forecast on Feb. 22.
Cable, a Liberal Democrat whose party is in coalition with Osborne’s Conservatives, said the rating agencies are “like tipsters” who have a “bad record,” and the change will have little impact on the economy.
“It’s largely symbolic, in terms of the real economy there is no reason why the downgrade should have any impact,” Cable said in an interview with BBC TV’s Andrew Marr show.
“Last year, the U.S. was downgraded, the economy grew strongly relative to Europe, President Obama was triumphantly re-elected. France had a downgrade last year, its interest rates that it borrows long-term in the market are only a little above ours.”
Sovereign Yields
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by S&P. “What Moody’s said is old news and it is behind the curve,” Stuart Thomson, who helps oversee $109 billion at Ignis Asset Management in Glasgow, Scotland, said in a phone interview.
“Other agencies may follow it, but at Ignis we think the U.K. economy is doing far better than Moody’s thought.”
Pound’s Decline
The pound fell after the downgrade in the last half-hour of trading in New York, dropping 0.6 percent to $1.5163. Sterling has depreciated 5.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.
“In terms of gilts, the dominant factor remains the prospect for more QE, which we think is likely,” Michael Amey, portfolio manager at Pacific Investment Management Co., said in an e-mail.
Aviva’s Ikram agreed that bond purchases by the Bank of England, where Bank of Canada Governor Mark Carney will start work in July, will have a greater impact on gilts than the downgrade.
“For us at Aviva, a more important factor to watch for gilts is the Bank of England’s bond-buying policy,” Ikram said.
“If the central bank decides to stop buying, gilt yields will have to rise further. But again, there will be investors out there, such as sovereign wealth funds, who would bid for gilts when yields are higher.”
King Pressing
Outgoing Bank of England Governor Mervyn King is pressing for more bond purchases and leading a debate on what can be done to encourage lending, boost exports and bolster the recovery, including the bank and the government working together to spur economic growth.
He voted in the Monetary Policy Committee on Feb. 7 to increase QE by 25 billion pounds ($38 billion), though was unable to convince enough of his colleagues to support him.
The yield on 10-year U.K. government bonds, or gilts, was little changed at 2.11 percent at the market close on Friday, and that was before the downgrade was announced. That compared with a record low of 1.407 percent reached on July 23 and an average of 3.945 percent in the past decade.
Moody’s cut France’s top rating on Nov. 19 by one level. S&P lowered the rating by one step to AA+ from AAA on Jan. 13, 2012. Yields on the nation’s 10-year bonds have climbed 16 basis points, or 0.16 percentage point, since the Moody’s downgrade.
The borrowing cost has declined 84 basis points since the S&P cut. Moody’s also downgraded from Aaa Ireland in 2009 and Spain in 2010.
March Budget
U.S. Treasuries rallied after S&P stripped the U.S. of its top ranking on Aug. 5, 2011, with yields touching a record low 1.379 percent in July 2012.
U.S. government debt gained 9.8 percent in 2011, the most in three years, according to Bank of America Merrill Lynch index data. Osborne will need to convince rank-and-file lawmakers in his Conservative Party that the budget he delivers on March 20 will bring growth and a boost in the polls for the party.
Lawmaker Adam Afriyie, who has been mooted as a possible replacement for Prime Minister David Cameron as party leader, used an article for the Mail on Sunday to call for massive tax cuts, while ministers publicly backed the chancellor.
“I don’t think for most people actually, that in the circumstances of 2013, this change to the credit rating comes as much of a surprise,” cabinet minister and former Chancellor Ken Clarke told Sky News.
“So long as we make it clear we’re sticking to deficit and debt reduction and that we have strong policies for growth alongside them then we’ll maintain confidence.”
bloomberg.com
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