Thursday, 10 December 2009

Citi analyst sensing UK's AAA rating to be ratched downwards

FT Alphaville cites comments from a Citi bank analyst on yesterday's lamentable PBR statement from Chancellor Darling.

Leaving aside all of the questionable assumptions about a 3.5% rate of growth from 2011 onwards and the lack of any specificity about exactly how the government plans to cut the deficit in half over four years, which I referred to here as Ostrich economics, the Citi analyst focused on the fractious political dimension which may well be the tipping point for the hallowed credit ratings agencies to nudge the AAA grade down to AA.
Under a hung parliament we see little prospect of a credible fiscal retrenchment and that, against a backdrop of rising yields and an exit from quantitative easing could very quickly change the ratings agencies assessments of the UK’s creditworthiness.

Unless we get a credible set of measures put in place quickly, which seems unlikely unless we get a Conservative government with a clear majority at the next election, we think the UK’s Aaa rating will be right up on the radar screens in a very short space of time. The lasting legacy of the current administration may well prove to be the loss of the UK’s AAA credit rating.
For those who missed Mr. Darling's speech yesterday there was a valiant attempt on his part to inspire the naysayers with some upbeat comments about UK government assistance to new UK technology firms. On a related theme, one direct beneficiary of this largesse would be manufacturers of boilers who will benefit from a variation on the "cash for clunkers" theme designed to encourage households to switch from their old domestic heating systems to more energy efficient ones.

In view of the rather downbeat assessment coming from many financial analysts, what may have been more useful would have been more government assistance to makers of sophisticated mirrors to go with all of the smoke that the government is currently blowing the market's way.

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