With talk of deep public sector cuts now beginning to become actions, there is widespread worry about jobs, the economy and the distinct possibility of a double dip recession.
The whole point behind the ‘austerity’ plan is to maintain market confidence in our economy by dealing with the huge deficit. To let sovereign debt holders and those looking to lend to us on that basis, that the UK is a safe bet. This would preserve out coveted AAA status so keeping our interest payments down.
But ominous rumblings from the rating agency Standard & Poor’s (S&P) are sending out a different message. This is despite the already ambitious plan to deal with the debt situation and follows on from data from the Office for National Statistics (ONS) that indicated government spending was all that recently stopped the UK sliding back into recession. The Telegraph reports that S&P have said: " ….. medium-term economic forecasts for the UK are less optimistic than the assumptions underlying the Budget ……. We therefore believe there is still a material risk that the UK's net general Government debt burden may approach a level incompatible with the 'AAA' rating."
Bank of England Monetary Policy Committee member Adam Posen is also not convinced that we can avoid a second dip to the recession. Talking to The Journal he said "There is a chance we could slip back into recession. I hope it is not the case. There is going to be a lot of drag on the economy, with the problems of the eurozone and the public sector contraction in the UK."
One rating agency has downgraded the UK though. Dagong Global Credit Rating Company of China has downgraded the US, Britain, Germany and France from their traditional status of AAA. According to their report they have “ …. carried out in-depth research into the intrinsic rules of the formation of sovereign credit risk under the context of the globalization of credit risk, and has so far set up a brand new system of sovereign credit rating theories as well as the rating standards, with reference to the empirical outcomes from the rating experiences of international rating agencies”.
The following table of the downgraded countries comes from their report:
It will be interesting to see which of these ratings the investors with the money will follow. Then, either Dagong’s ratings will have to fall into line with the others, or maybe the others will find themselves following Dagong more.