Rating agency lowers its outlook on UK to negative

LONDON – The Associated Press

A file picture shows a homeless man resting in the doorway of a branch of a Lloyds Bank in central London. AFP Photo

Fitch lowered Britain’s long-term outlook late March 14 to negative from stable, while confirming its top-level AAA rating.

The ratings agency said the revision “reflects the very limited fiscal space to absorb further adverse economic shocks in light of such elevated debt levels and a potentially weaker than currently forecast economic recovery”.

The change represented a more than 50 percent chance of a downgrade over the next two years, Fitch said, citing ongoing financial tensions in the eurozone.

“The easing of financial market tensions in the eurozone in recent months has diminished the risks to the UK, but in Fitch’s opinion, the crisis is not resolved and could once more intensify,” a statement said.

While British banks were relatively well placed to absorb shocks of future market turmoil and losses on eurozone exposures, an intensification of the eurozone crisis may impact on the government’s ability to meet its deficit and debt reduction targets, said the agency.

Fitch said its confirmation of the AAA rating reflected progress made in reducing the government’s structural budget deficit.

“The U.K.’s ‘AAA’ rating is underpinned by a high-income, diversified and flexible economy as well as political and social stability,” it said.

However, the deficit was second in size only to that of the US and indebtedness was “significantly above the ‘AAA’ median”.

“Fitch judges the government’s fiscal consolidation plans to be credible, reflecting the strong political commitment and institutional capacity,” it said, adding the upcoming budget was expected to reaffirm the government’s commitment to deficit reduction.

Triggers that could prompt a downgrade include fiscal easing resulting in government debt peaking later and higher than the current forecast of about 94 percent by 2014-15, as well as adverse shocks resulting in higher levels of government borrowing and debt than currently projected.

“In the absence of adverse shocks, Fitch does not expect to resolve the Negative Outlook until 2014,” said the statement.

Fitch last formally reviewed Britain’s sovereign ratings a year ago.