Britain's AAA Credit Rating Under Threat as Government Bail-out Strategies Emerge

Strategic Insights -

Britain's economic stability is being put under pressure as the Government's bank bail-out strategies may risk its prized AAA credit rating, according to Standard & Poor's. The ratings agency has confirmed its stable outlook for the UK's sovereign debt but has expressed concerns over the Government's asset protection scheme, which could leave taxpayers exposed to billions of pounds in bad loans made by banks. A downgrade to its credit rating would come at a critical time, as the country is on track to borrow an additional £500 billion over five years, taking the national debt above £1 trillion for the first time.

Key Takeaways:

  • The Government's asset protection scheme could leave taxpayers exposed to losses on billions of pounds of bad loans made by banks, potentially jeopardizing the UK's AAA credit rating.
  • A downgrade to the credit rating would increase the interest bill, putting further strain on the economy, as the UK is on course to borrow an additional £500 billion over five years.
  • S&P has indicated that it may have to revisit the rating due to the Government's plans to ring-fence £400 billion of "toxic" bank debt, or 29% of GDP.
  • Economists have forecast debt to reach 70% of GDP by 2011, raising concerns that net debt above 60% of GDP could undermine the AAA rating.
  • The UK's credit default swaps (CDS) have risen sharply this year, from 106.9 basis points to 158.6, indicating the market's dwindling faith in the security of UK gilts.
  • S&P has already downgraded the sovereign ratings of Spain and Greece this year, highlighting the increasing pressure on the UK's credit rating.
  • The Government's planned economic stimulus package is at risk of being devastating if the UK loses its AAA credit rating or is put on "negative watch".

Barry Hancock, head of European corporate ratings at Standard & Poor's, testified before the Treasury Select Committee that the agency had confirmed the UK's AAA rating on the assumption that up to approximately 20% of GDP in the form of bank assets could be problematic in the future. This equates to £280 billion, using the UK's GDP of £1.4 trillion. However, the Treasury is now planning to ring-fence £400 billion of "toxic" bank debt, or 29% of GDP.

Statistics:

  • The UK is on course to borrow an additional £500 billion over five years, taking the national debt above £1 trillion for the first time.
  • The Treasury is preparing to ring-fence £400 billion of "toxic" bank debt, or 29% of GDP.
  • S&P has forecast that up to 20% of GDP in the form of bank assets could be problematic in the future, equating to £280 billion.
  • Credit default swaps (CDS) on UK sovereign debt have risen sharply this year, from 106.9 basis points to 158.6.
  • Economists have forecast debt to reach 70% of GDP by 2011.

Sources:

  • Standard & Poor's (Source)
  • Treasury Select Committee (Source)
  • Royal Bank of Scotland (Source)
  • Frank Gill, S&P's director of European sovereign ratings (Source)
  • George Buckley, chief UK economist at Deutsche Bank (Source)
  • Deutsche Bank (Source)