Status: 06.10.2022 12:45 p.m
Despite the British government’s about-face in tax policy, the rating agency Fitch is now warning of a credit rating downgrade. The consequences for Britain would be unpleasant.
The rating agency Fitch has lowered the outlook for the UK’s creditworthiness from previously “stable” to “negative”. The rating of the long-term foreign currency bonds will initially remain at “AA-“, the credit rating officers announced on Wednesday evening.
This means that the United Kingdom is threatened with a downgrading of its credit rating in the near future. That would mean that Fitch rates the risk of a loan default higher. The consequence would be that the UK would have to pay higher interest rates in the financial markets to borrow money. The players on the financial markets, such as banks, institutional investors, funds and private investors, are compensated for their higher risk of default with higher interest rates.
The other two major rating agencies S&P and Moody’s had also been critical of the government’s economic course in the past few days. S&P had also announced a credit rating downgrade.
Kwasi Karteng rows back
A few hours before the Fitch decision, Prime Minister Liz Truss, who was also under pressure from within her party, defended her fiscal policy course in a speech at the conservative Tories party conference in Birmingham. The goal is economic “growth, growth, growth”.
The new British finance minister, Kwasi Kwarteng, had previously overturned the abolition of the top income tax rate of 45 percent. This point in particular had led to severe criticism in his own party.
No recession yet
Great Britain is currently suffering from the worst economic crisis in decades and high inflation. Electricity and gas prices for consumers will probably rise by 80 percent in October, and many companies are on the brink of collapse due to high energy costs.
The country recently narrowly avoided a recession: according to the national statistics office, the economy grew by 0.2 percent in the second quarter. It had previously assumed that gross domestic product (GDP) would fall by 0.1 percent in this period.
The entire tax cut package had caused turbulence in the financial markets: the British pound had fallen to an all-time low against the dollar, and the bond market had also tumbled. Due to the turbulence, the British central bank felt compelled to intervene in the domestic bond market. Since then she has been buying government bonds again.
Debt increase is expected
Truss did not convince the rating agency, because Fitch continued to cite the government’s financial policy in London as justification: “The large and unfunded financial package that was announced as part of the new government’s growth plan could lead to a significant increase in the deficit in the medium term. “
Fitch also justified the step by saying that the new Prime Minister’s room for maneuver could be restricted by the declining popularity of her Conservative Party, the consequences of the inflation crisis and other factors.
British pound recovers
Investors and market experts also remained skeptical. The rating agency S&P is sticking to its critical assessment: the reversal has no significant impact on the material reasons for the decision to issue a downgrade warning for Great Britain’s AA credit rating.
Jane Foley, financial markets expert at Rabobank, said it would only be clear whether the government had done enough when the Bank of England’s intervention ended on October 14. British assets, the pound and government bonds are not out of the woods yet, she said. On the financial markets, however, the pound sterling has now recovered from its lows.