S&P announces UK credit rating with “negative outlook”.

The UK’s credit rating was threatened with a downgrade late Friday when S&P, one of the world’s largest credit rating agencies, put the country on a “negative outlook” after Chancellor Kwasi Kwarteng’s “mini” budget last week.

The rating agency maintained the UK’s double-A investment grade credit rating but cautioned against a negative outlook. S&P said there were “additional risks” in lending to the UK following the Chancellor’s statement.

The threat of a credit rating downgrade will embarrass the Truss government just weeks after the new prime minister takes office. The ‘mini’ budget caused the pound to fall and interest rates to rise as financial markets thought it would fuel inflation at a difficult time.

S&P said its decision was based on the financial report and the government’s plan “to cut a range of taxes in addition to its previously announced intentions to extend wide-ranging support for households on energy bills.”

Rating agencies have lost some of their power since the 2008-09 financial crisis, when they failed to warn about the risks of many of the complex products to which they had given top triple-A ratings. But their sovereign ratings are still closely watched.

Most public finance experts were more sanguine about the decision to spend billions on a temporary program to keep electric and gas bills down this winter than the permanent cuts to Social Security and income taxes, including the top rate, and the decision to freeze them not to increase the main level of corporate income tax.

Over the past week, the pound hit an all-time low against the US dollar before recovering, the cost of borrowing rose more than 0.5 percentage point, the Bank of England had to step in to tighten the pension system and mortgages Protect Lenders have withdrawn most fixed income products from the market.

S&P estimated that Kwarteng’s package would increase the UK’s budget deficit by 2.6 percentage points of gross domestic product by 2025, making it very difficult for the Chancellor to meet his goal of reducing public debt as a percentage of national income.

The rating agency said that “government net debt will continue to trend upward, contrary to our previous expectation that it will decline as a percentage of GDP from 2023 onwards.”

S&P said it still expects the UK economy to contract in the coming quarters, adding it’s still unclear whether the government’s promises of less borrowing through public spending cuts would materialize and be enough to support the economy put debt back on a declining path.

This is particularly difficult against a backdrop of a weak global economy, rising interest rates hitting the housing market and uncertain consumer sentiment.

With the government’s budget watchdog silenced by the end of November, S&P forecast a difficult time for the UK economy.

“We believe our updated fiscal forecast is subject to additional risks, for example if the UK’s economic growth turns out to be weaker due to a further deterioration in the economic environment, or if the government’s borrowing costs rise more than expected due to market forces and monetary policy tightening” , it was said.

https://www.ft.com/content/ac967983-2f4f-4b0b-8714-4b7d356b2530 S&P announces UK credit rating with “negative outlook”.

Adam Bradshaw

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