U.K. Still AAA at Fitch

Fitch Ratings today affirmed its AAA ratings on the U.K.’s foreign currency issuer default rating, local currency issuer default rating, and country ceiling. The currency ratings outlooks were maintained as negative.

The agency seems to say that the country should be happy it didn’t adopt the euro:

The independent monetary policy framework, as well as sterling’s reserve currency status, affords the UK higher financial and economic policy flexibility and debt tolerance than many of its high-grade peers. The gradual improvement in the UK banking sector’s capital and liquidity position has further reduced the contingent liabilities arising from this sector. The long average maturity of UK debt — the longest of any high-grade sovereign – also adds to the debt tolerance of the UK as a benchmark borrower in its own currency. Fitch judges the risk of a fiscal financing crisis to be negligible.

But here is the catch:

[W]eaker than expected growth and fiscal outturns in 2012 have increased pressure on the UK’s ‘AAA’ rating, which has been on Negative Outlook since March 2012. With a structural budget deficit second in size within the ‘AAA’ category only to the US (‘AAA’/Negative), and general government gross debt (GGGD) approaching 100% of GDP in 2015-16 under Fitch’s revised baseline estimates – the upper limit of the level consistent with the UK retaining its ‘AAA’ status – the likelihood of a downgrade has therefore increased.

Fitch also expects the U.K. economy to contract by 0.3% in 2012, a significant drop since March, when the agency said it expected growth of 0.8% for this year. The agency also noted what would cause a downgrade of the country’s debt:

• General government gross debt failing to stabilise below 100% of GDP and on a firm downward path towards 90% of GDP over the medium-term.
• Discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast.
• A material downward revision of the assessment of the UK’s medium-term growth potential.

The Fitch Ratings press release is available here.

Paul Ausick