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Thursday, 21 May 2009

Outlook on UK economy downgraded to 'negative'

LONDON (AFP) - - International ratings agency Standard and Poor's on Thursday downgraded its outlook on Britain's economy to "negative" from "stable" owing to the country's "deteriorating public finances."

The change may eventually lead to S&P downgrading Britain's top-level sovereign credit ratings, the agency warned in a statement.

"The outlook revision is based on our view that, even factoring in further fiscal tightening, the UK's net general government debt burden may approach 100 percent of GDP (Gross Domestic Product) and remain near that level in the medium term," S&P said in a statement.

Britain's public deficit ballooned to a record 8.5 billion pounds (9.6 billion euros, 13.22 billion dollars) in April as the Labour government was forced to bail out ailing banks and recession slashes tax revenues, according to official data published Thursday.

The data, together with S&P's downgrade, sent the British pound and stocks sliding in London, traders said.

S&P credit analyst David Beers said the agency had based its revision on its "updated projections of general government deficits in 2009-2013.

"These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow," Beers said.

S&P on Thursday maintained its sovereign credit ratings for Britain at 'AAA' long-term and 'A-1+' short-term. Both ratings signify the highest confidence that Britain will repay its borrowings.

However, the agency warned that the ratings could be lowered following Britain's next general election that must be held by mid-2010.

"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," Beers said.

"Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing."

A downgrade of a credit rating can have significant consequences for a country, pushing up the interest rates demanded by savers to buy new debt, increasingly being issued to help cover soaring budget deficits.

Britain's recession-battered economy is shrinking at its fastest pace in almost 30 years.

GDP contracted by 1.9 percent during the first three months of 2009 compared with a decline of 1.6 percent in the last quarter of 2008.

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