A new financial report signals that Britain is still in the depths of economic turmoil and will not recover from the downturn soon.
The Standard and Poor (S&P) rating agency, the benchmark index for traders, have concerns over the government’s deteroriating finances and its limited ability to lift the debt burden in the short to medium term.
The S&P lowered its outlook on Britain from ‘stable’ to ‘negative’, prompting the British Pound to fall against the dollar and stocks and bonds to decline in global markets.
‘Even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of gross domestic product and remain near that level for the medium term,’ the S&P report noted.
According to the S&P, Britain is in danger of loosing its AAA rating, the highest credit rating standard. The rating assesses the credit worthiness of a corporation’s debt issues and is a key financial indicator to potential investors of debt securities such as bonds.
Members within the AAA category are considered prime grade and safe for investors, with a technical credit risk of almost zero, for example government bonds. Needless to say, this basic definition has been somewhat manipulated due to the unprecedented events in the credit crunch.
If Britain were to loose its top-level credit rating, it would be more difficult for the government to raise money through bond sales and make it more expensive finance its increasing debt burden, adding to its economic troubles.
Britain would be the fifth country in Western Europe after Greece, Ireland, Portugal and Spain, to have its credit rating lowered. Even for governments, it is much more difficult to raise than to decline in investment grading, suggesting that if a change in rating were to occur it would have possible long-lasting and detrimental effects to the government’s ability to raise capital.
Nevertheless, Britain’s latest bond auction of £5 billion on Thursday was well received. This was a relief to the government and market analysts after a similar sale in March failed. Moreover other renowned ratings agencies, such as Moody’s and Fitch, have not altered their view on Britain’s prospects.
The money that the government has borrowed, now hoping to be returned through bond auctions, was intended to help Britain escape the worst aspects of the recession but the spending program has also burdened the government with the highest debt level since World War II. It’s budget deficit reached £8.5 billion, in April. The Treasury said that it expected the deficit to reach £175 billion, or 12.4 percent of gross domestic product, this year.
Although successful bond auctions may help to recuperate credit and provide the government with fiscal relief in the short term, it is debatable whether the erosion in the government’s financial base will return to a safe level in a suitable timeframe.
If this were not to be the case, necessary government spending may have to be reduced, further disadvantaging those in the country that are suffering the most economically.
Currently it seems that there is no way for the government to escape economic volatility without encountering further uncontrollable and problematic consequences for the British financial system and British citizens.
With Gordon Brown facing a General Election next year, one hopes – if only for his party’s sake – that further fiscal problems can be appropriately managed, if not entirely avoided.