Will the UK be downgraded – and does it matter – MoneyWeek

Shouldwebeworriedaboutthis?

Isitevenworthlisteningtoratingagenciesatall?

Areratingagenciesanygood?

Therearemanyreasonstothinkthatcreditratingsaren’tworththepaperthey’reprintedon。

Ratingsagenciescompletelyfailedtowarnofthesubprimecrisisforexample。

Andcreditspreadsonsovereigndebtarebetteratpredictingdefaultthanratingsthemselves。

Certainly,themarketisn’tphasedbythedowngradethreat。

Thecostofinsuringten-yearUKbondsiswellbelowthepeaklevelsofearly2009–andhasevenfallenfromthreemonthsago。

However,becauseofthepoliticalsensitivityasmuchasanythingelse,decisionstodowngradearenottakenlightly。

So,whileMoody’swarningdoesn’tmeanmuchforthepriceofgilts,it’sareminderthatBritain’seconomyfacessomeseriousproblems。

Thegoodnewsforthegovernmentisthat,initsreview,Moody’sagreesthat‘austerity’isagoodidea。

Indeed,itnotesthat,“thegovernmenthasdemonstrateditswillingnessandabilitytotakeactiontoaddressshortfalls”。

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However,thebadnewsisthatallthiscouldcountfornothingiftheeconomystalls。

Arecessionwouldhitthetaxbase,whilemorepeopleoutofworkmeansmorebenefitspending。

LowergrowthalsomeansthattheUKgovernmentwillhavetoworkhardertocutthedebt-to-GDPratio。

Thiswould,“putintoquestionthegovernment’sabilitytoplacethedebtburdenonadownwardtrajectorybyfiscalyear2015-16”。

Moody’sisalsoworriedthattheeurozone’stroubleswillaffecttheUK–andit’shardtoarguewiththispoint,givenEurope’ssignificancetoBritainasatradingpartner。

Whattodo?

Ofcourse,thechancesofagenuinefiscalcrisisremainextremelyremote–BritainisnotGreece。

However,itdoesraisethequestion:whattheUKcandotoprotectitssovereignratingandboostgrowthatthesametime?

Fiscalexpansion(moregovernmentspending)isanon-startersinceitwouldincreasedebtlevels。

Indeed,Moody’shasarguedthatreversingcutswouldmakeadowngrademuchmorelikely。

Sothesolutionthateveryonewillreachforisalmostcertainlyfurthermonetarystimulus:Moody’scommentscanonlyaddtothepressureontheBankofEnglandtoengageinanotherroundofquantitativeeasing。

Suchapolicywouldbecontroversial–andwe’vealreadycoveredtheargumentsforandagainst。

However,regardlessofobjections,it’swhat’slikelytohappen。

Andwithothercentralbanksaroundtheworld,fromJapantoEuropetotheUS,threateningtodothesame,italladdsuptoanotherverygoodreasontohavesomegoldinyourportfolio。

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