Standard & Poor has just become the first credit rating agency to downgrade the UK from a “stable” assessment to “negative” – and given that the Tory borrowing proposals until 2014 are virtually identical to Labour’s, it is a warning that should chill Cameron. It’s feasible to fund your government with IOU notes now, with the Bank of England printing money to buy them, and a global flight-to-safety making a bull market in bonds. But after the next election, with equity markets recovering and the QE policy exhausted, how will Cameron find buyers for the £150bn a year debt he currently envisages issuing?
The S&P note is not public, but I reprint here what it has told clients. Note it has not altered its AAA status, just its rhetotic and overall position. I’d be very intertested, as always, in what CoffeeHousers make of it:
“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100% of GDP and remain near that level in the medium term,” “Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of GBP100 billion-GBP145 billion, or 7%-10% of 2009 estimated GDP.” “However, the parties’ intentions will likely remain unclear until the next administration is formed after the general election, due by mid-2010. How quickly the government can stabilize and then reduce the government debt burden will also depend on the timing and shape of the economic recovery and whether the cost of government support of the banking system is higher than we currently assume, areas where we also see continued downside risks.