Stockpicks,Football and OT

[pkripper]

Ratings agency downgrades outlook for UK economy

• Government debt burden 'may approach 100% of GDP'
• 'One-in-three chance' that Britain's credit rating may be cut
• FTSE 100 fell more than 2%; sterling falls to $1.55



Chancellor Alistair Darling announced hugely increased government borrowing projections in last month's budget. Photograph: Reuters

Ratings agency Standard & Poor's today downgraded its outlook for the British economy, saying it had grown increasingly worried about the country's ballooning budget deficit. It also warned there was a "one-in-three chance" that Britain's credit rating may be cut.

The surprise news pushed shares in London down sharply and caused gilt yields to soar on renewed fears about the recession-hit UK economy. The FTSE 100 at one point tumbled more than 2%, or 100 points, to 4352. Sterling, which had reached a six-month high of $1.58 earlier, fell three cents to $1.5530.

S&P's move caught most City experts on the hop. "This is exactly what the UK really did not need," said Manus Cranny, senior market commentator of MF Global Spreads. "The Treasury will now be hamstrung as its delicate attempts to flood the market with gilts to fund the deficit could literally be in tatters if S&P is followed by other agencies."

Colin Ellis, European economist at Daiwa Securities SMBC, said that with the "cherished" triple-A rating now under threat, the S&P move puts the spotlight on public finances. "Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day – but today's announcement by S&P puts that much more pressure on the next government to act quickly."

S&P credit analyst David Beers said the ratings agency had based its outlook revision "on our view that, even factoring in further fiscal tightening, the UK's net general government debt burden may approach 100% of GDP and remain near that level in the medium term".

Although S&P said it was retaining the "AAA" long-term and "A-1+" short-term ratings for Britain's sovereign debt, the vast bulk of which is in gilts, Beers warned there was "a one-in-three chance" that it will be cut.

"We base our opinion on our updated projections of general government deficits in 2009-2013," he said, referring to the huge upward revisions to government borrowing projections chancellor Alistair Darling unveiled in his budget on 22 April.

"These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed and, consequently, the pace at which historically high fiscal deficits are likely to narrow," he added.

But, he said, the agency believed the overall ratings on the UK continued to be supported by its wealthy, diversified economy, a high degree of fiscal and monetary policy flexibility, and its relatively flexible product and labour markets.

"However, last month's budget announcements underscored that UK public finances are deteriorating rapidly – at a faster rate than S&P had previously assumed."

The Liberal Democrat Treasury spokesman, Vince Cable, said: "Alistair Darling has relied on implausible growth forecasts for the British economy which nobody but himself believes.

"Markets hate uncertainty and until the government comes clean about how it intends to pay back its debt, it is perfectly possible that we will see a further deterioration in Britain's rating."

The news came as figures showed that public sector net borrowing hit a record for April of almost £8.5bn.

But other news added to growing evidence that the economic slump may be past its worst. Figures showed retail sales in April grew 0.9% from March, much faster than expected, leaving them 2.6% up on a year earlier. That reinforced survey evidence from the British Retail Consortium and the CBI that sales grew strongly last month, boosted by Easter trading.

Other figures, though, showed mortgage lending dropped sharply in April while business investment slumped in the first quarter of the year.

http://www.guardian.co.uk/business/2009/may/21/standard-poors-uk-economic-outlook