UK Losing AAA rating...?...

BlondeHeadOn

From Stephanie Flanders at the Beeb, here:

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/12/overrated.html

"There's been a lot of talk about Britain losing its AAA credit rating down the road. But guess what? As far as the markets are concerned, we already have.

I've been taking a look at what's happened to the interest rate (yield) on UK government debt relative to other highly rated countries. The answer is highly instructive, if not a little depressing.

UK gilts traded very close to the average of other AAA-rated countries for most of 2007 and 2008, as you'd expect. But this year a gap has opened up between us and the others.

.... Judged solely in terms of the interest rate (and implied risk premium) demanded on our debt, the market considers us very close to an AA country, like Japan, Portugal or, er, Ireland, and rather far from other AAA colleagues like France or the US. As a result, we are paying 30-40 basis points more for our debt (0.3-0.4 of a point) than the average of other AAAs."

The full article is interesting (and rather worrying), worth a read.

Really2

BlondeHeadOn wrote: »

From Stephanie Flanders at the Beeb, here:

http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2009/12/overrated.html

"There's been a lot of talk about Britain losing its AAA credit rating down the road. But guess what? As far as the markets are concerned, we already have.

I've been taking a look at what's happened to the interest rate (yield) on UK government debt relative to other highly rated countries. The answer is highly instructive, if not a little depressing.

UK gilts traded very close to the average of other AAA-rated countries for most of 2007 and 2008, as you'd expect. But this year a gap has opened up between us and the others.

.... Judged solely in terms of the interest rate (and implied risk premium) demanded on our debt, the market considers us very close to an AA country, like Japan, Portugal or, er, Ireland, and rather far from other AAA colleagues like France or the US. As a result, we are paying 30-40 basis points more for our debt (0.3-0.4 of a point) than the average of other AAAs."

The full article is interesting (and rather worrying), worth a read.

But does that not mean if we did lose it there would be no change as it is already priced in to the markets?

lostinrates

Really2 wrote: »

But does that not mean if we did lose it there would be no change as it is already priced in to the markets?

Didn't generali say something assuradly wise about the costs/ability of an AAA financial institution staying in an AA country?

Really2

lostinrates wrote: »

Didn't generali say something assuradly wise about the costs/ability of an AAA financial institution staying in an AA country?

That there rating could not be higher than the countries.
What difference would that make though like say HSBC they are in Japan and they are only AA rated.
If it is already priced in I presume their borrowing would remain the same... Anyone know?

chucky

lostinrates wrote: »

Didn't generali say something assuradly wise about the costs/ability of an AAA financial institution staying in an AA country?

a AAA institution or country will have a band of rates.
a AA institution or country will have a more expensive band of rates

i'm sure that there must be some crossover between them though

JP45

We've said a lot about the conflicted position of the ratings agencies in relation to the banks and other financial institutions. Everyone agrees that the agencies shouldn't have been financially dependent on the institutions whose assets they were rating.

But now the spotlight is turning to sovereign debt, and we see that the same conflict - writ gigantic - is there in the relationship between the ratings agencies and governments.

Countries such as the UK are desperately hoping to hold on to their AAA ratings, just as the ratings agencies wait to find out whether their critical position in the international financial system is going to be taken away by - er, countries like the UK.

Of course, the ratings agencies insist that politics plays no part in their decisions. Far be it for me to suggest otherwise. But you have to at least call it a conflict of interest.

It's a conflict of interest that certainly appears to be working to our advantage. This apparent discrimination - UK (AAA) v Ireland (AA) - was also highlighted in an interesting article by David Smith in last weekend's Sunday Times:

The PBR, despite the headlines, represented a net loosening of fiscal policy, as the Treasury admits. The Institute for Fiscal Studies (IFS) points out that extra spending on "frontline" health and education and maintaining police numbers adds up to £15 billion over the two years from 2011, against extra taxes of about £9 billion.

At a time when the priority should have been setting out a clear and decisive plan for getting borrowing down over the medium term, the chancellor made the challenge for him, or more likely his successor, even harder by adding to spending.

I do not agree with everything Vince Cable says but the Liberal Democrats' Treasury spokesman was right to say: "Alistair Darling should have laid out exactly where cuts would be made. Instead, he chose to pretend that everything was fine and that he could carry on with tax and spend."

As it is, nobody is fooled. Thanks to the IFS, we know the Treasury's numbers imply real cuts for departmental spending that is not ringfenced of 6.9% a year in real terms from 2011, or one fifth over three years. That is what the numbers imply, though after last week I have no confidence in the ability of this government to deliver them, even after a general election.

People have rightly drawn the contrast between Darling and Brian Lenihan, Ireland's finance minister, who on the same day announced deficit-cutting measures, overwhelmingly on public spending, of Û4 billion (£3.6 billion), 2.5% of GDP.

Where Lenihan was bold, Darling was cautious. He did not need to act immediately but the absence of a medium-term plan to deal with Britain's deficit, which is similar to Ireland's, was irresponsible. As the Reform think tank put it, the score last Wednesday was Ireland one, Britain nil.

Perhaps the real Darling got lost somewhere in Downing Street, diverted by a lot of Brown and a load of Balls, as has been suggested. Either way, given that the spring budget — if we have one — will be even more ostrich-like than last week's effort, the fiscal uncertainty will continue.

The markets and the rating agencies let Britain get away with it because it is bigger than Ireland, which is unfair. It would be unwise to rely on Britain getting away with it indefinitely.

http://www.economicsuk.com/blog/001051.html#more

ruggedtoast

I really hope this doesnt happen as most of my small appliances, like remote controls, only accept AAA.

BlondeHeadOn

JP45 wrote: »

It's a conflict of interest that certainly appears to be working to our advantage. This apparent discrimination - UK (AAA) v Ireland (AA) - was also highlighted in an interesting article by David Smith in last weekend's Sunday Times:



http://www.economicsuk.com/blog/001051.html#more

Another good article on this, thanks JP45.

Makes the recent pre-budget report seem even more of a missed opportunity....

Really2

ruggedtoast wrote: »

I really hope this doesnt happen as most of my small appliances, like remote controls, only accept AAA.

But at least the will run longer and be cheaper if they are AA (PS top post:))

HammerSmashedFace

I agree that we have been downgraded already in the eyes of the market. In my opinion the sh*t is going to hit the fan when QE is stopped, who the hell else is going to buy our debt ?

I've said a million times (million and one now:D), the 'recovery' that has been spun and ramped in the media does not exist, it's a perception to some through the rose tinted glasses of QE & low IR's What has happened over the past 9 months is to make this whole business a whole lot worse when the days of reckoning arrive, especially for those who've over-leveraged on the back of Daily Express headlines.

purch

he costs/ability of an AAA financial institution staying in an AA country?

Yes it would be hard to imagine how it would work if an AAA rated institution was domiciled in a lower rated country.

It would certainly be bizarre for the "lender of last resort" (BOE) having a lower credit rating than those borrowing from it :eek: