Fitch Downgrades UK's Credit Rating

Fitch became the second rating agency after Moody's to strip the coveted ‘AAA’ rating given to the United Kingdom for its long-term foreign and local currency Issuer Default Ratings (IDR). Now the country's IDR stands at 'AA+' from the earlier 'AAA'. This downgrade has come after the rating agency has maintained a negative outlook on the UK's sovereign ratings since March 14, 2012. The reason for this downgrade was cited as a weaker economic and fiscal outlook.

According to the Fitch forecast, the government's gross debt will now peak at 101% of the GDP in 2015-16, and will start a downtrend only from 2017-18. This is against the earlier prediction of gross debt of the country peaking at 97% and will start declining from 2015-16. If we compare the gross debt of the UK, this is considerably high against the median gross debt of around 50% for the other 'AAA' rated country. At the end of CY12, UK's net debt stands at 75.1% of GDP (excluding financial interventions). This has doubled from 37% of the GDP at the end of 2007. The country's budget too is running at a deficit of 7.9%.

The reason for such a high net debt and budget deficit is due to the weak growth witnessed in UK's economy. Out of the last 8 quarters until December 2012, UK's economy has shrunk in 4 quarters on a yearly basis. Of these 4 quarters of contraction, 3 are from 2012 alone. Fitch has even revised its economic growth forecast for the UK economy for 2013 and 2014 to 0.8% and 1.8% respectively, from 1.5% and 2.0% at the time of the last review of UK's sovereign ratings in September 2012. 

One of the disadvantages of such a downgrade is that it increases the cost of borrowing. However, if we look at the previous example when the USA was stripped of its ‘AAA’ rating by S&P, the cost of borrowing had not increased there. On the contrary, the cost of borrowing has gown down. Therefore, we have to understand the fact that ‘AA+’ is the new ‘AAA’ in the current uncertain global economic situation and it is thus not going to impact the UK economy considerably.