Home » Finance » UK downgrade pressures reluctant Osborne to change course

UK downgrade pressures reluctant Osborne to change course

osborneChancellor George Osborne said he would not flinch from his austerity drive, despite increasing pressure to change course after the loss of the country’s ‘AAA’ credit rating and with elections approaching in two years, Reuters reports.

Moody’s dealt Britain its first sovereign rating downgrade on Friday, saying the economy faced years more sluggish growth and debt would continue to rise until 2016.

Economically the one-notch cut will have limited importance – most of Europe, Japan and the United States have already suffered the same fate, and Britain continues to borrow at historically low rates.

But politically it is toxic for Osborne, who has repeatedly vowed to protect Britain’s top credit rating since the 2010 election campaign. This downgrade exposes the Chancellor to opponents who say his failure to deliver economic growth is driving Prime Minister David Cameron towards electoral defeat.

Osborne defends that Moody’s move shows he was right to focus on restoring Britain to fiscal health which, according to him, was the only way to get growth going again. He added if Britain’s debt problem isn’t properly dealt with interest rates will soar, homes will be repossessed and businesses will go bust.

For investors, the downgrade underscores Britain’s predicament: a debt-ridden, stagnating economy that has kept bond yields low in large part thanks to the Bank of England becoming the world’s biggest investor in UK government debt by buying it with newly printed money.

A Treasury official noted Moody’s had given the UK’s credit rating a stable outlook, meaning little chance of a further downgrade in the next 12-18 months. When the United States and France were downgraded, their outlooks remained negative.

Sterling fell by almost a cent to around $1.5160 after the downgrade, just off Thursday’s fresh 2-1/2-year low and has continued its decline against the euro to €1.14.  

Osborne originally gambled that by slashing spending, growth rates of between 2 and 3 percent would kick in from 2013.

But with Britain’s banks still recovering from the financial crisis and many of its main trading partners in Europe stuck in recession, his debt targets will be missed. His room for more spending is limited as he tries to avoid pushing up yields on Britain’s 1.29 trillion pounds of debt.

With government spending so restricted, many investors’ hopes lie with the Bank of England. Its governor, Mervyn King, this month voted to restart buying of government bonds. If Osborne slows his debt reduction plans, he could upset bond investors and throw his deficit targets further off course.

Business lobby the Confederation of British Industry has called for more investment on infrastructure and housing to be funded by more cuts in day-to-day spending. It also expects the government to guarantee more private-sector projects.

Osborne has a chance in his annual budget next month to deliver such tweaks to policy.

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