The United Kingdom will retain its triple-A credit rating this year—despite growing fears of a double-dip recession caused by continuing upheaval in the euro zone—thanks to the Bank of England’s policy of quantitative easing (QE) and demand for UK gilts, City-based analysts told CNBC.
Quantitative easing in the UK is viewed “very favorably by S&P” because of the demand seen in the markets for UK debt, as is the coalition government’s policy on the structural deficit and its austerity program and S&P analysts have been moving to reassure the City that this remains the case, a City analyst told CNBC.com.
S&P is most concerned with the UK’s handling of its structural deficit. However the fact the government took early action to deal with the deficit is viewed positively, the analyst, who said he has spoken with people from the ratings agency, added.
A spokesperson for S&P declined to comment on the discussion with the analyst and on the specific reasons for the ratings agency’s current outlook for the UK. In a previous update in October, S&P reaffirmed its triple-A credit rating and stable outlook for British economy. The rationale given in the previous outlook was the same as that being quoted by the City analyst.
On Friday, nine euro zone counties, including France, were stripped of their triple-A credit ratings by S&P, following a lack of decisive action to combat the debt crisis.
The downgrades have caused a political storm in France, with Moody’s ratings agency piling on additional pressure on President Nicolas Sarkozy by warning on Monday that the country’s debts were putting pressure on its stable outlook for France’s triple-A rating. Moody’s said it would update its position on France later this quarter.
Other countries that saw their credit ratings downgraded include Austria, Spain and Italy, which saw its credit rating downgraded by two notches.
Elsewhere, respected economic think tank the Ernst & Young Item Club warned the UK was technically already back in recession and that GDP growth in 2012 would not be above 0.2 percent.
Germany’s Rating Still Seen as Safest
The downgrades by S&P leave Britain and Germany the only big European nations to have so far remained unscathed by the debt crisis, with analysts divided over what the future held for both countries.
“It could be very likely that the UK is downgraded this year. It’s interesting to see how the credit ratings agencies have changed their tone in recent months," Justin Urquhart Stewart, co-fund and director of Severn Investment Management told CNBC.com.
"Where in the past they were focused on austerity and dealing with debts, structural or otherwise, now they are beginning to make political statements about policies for growth and that austerity alone will not fix the problems country’s face," Urquhart Stewart noted.
“In the light of that new stance, everything that S&P said at the weekend about the euro zone could easily be applied to the UK. So although there is still very healthy demand for UK gilts, the change in tone from S&P could be seen as a warning to the UK as well. Don’t forget that the UK is currently paying around 125 million pounds ($191.3 million) in debt interest every single day. That’s more than the UK defense budget,” he said.
Similar concerns could begin to be applied to Germany, according to Urquhart Stewart, who said, however, that it was far less likely a downgrade in the country’s credit rating would occur.
“While everyone thinks Germany is in an enviable position, the economy is slowing down and the country does have a high level of debt. It would be less likely that Germany was downgraded but it is by no means impossible. But it would be unlikely to happen in Germany before it happened in the UK. I would think the UK would be downgraded first,” he added.
But Alan Clarke, UK and euro zone economist at Scotia Capital told CNBC.com that so long as UK debt interest payments as a percentage of tax revenue remained below double digits, its credit rating would remain intact. Currently, the ratio stands at between 7 and 8 percent.
“Unless things go really badly in the euro zone then the UK is OK for the foreseeable future,” he added. “Even if the UK falls into recession it will be really short and really shallow. It might be a bit of a risk to investor sentiment but it won’t be that big a deal and will most likely only be a technical recession of 0.1 or 0.2 percent.”
Clarke added it was highly unlikely there would be any movement on Germany’s credit rating but he noted that S&P had lowered its score “on the political side” so the chance of a downgrade had increased “but only marginally.”