Fitch threatens UK’s AAA rating with downgrade

Rating agency Fitch has put the UK’s AAA issuer default rating on negative outlook because of its high debt levels and weaker-than-forecast economic recovery.

The negative outlook means that there is a more than 50% chance the UK’s rating could be downgraded over a two-year horizon.

“The revision of the rating outlook to negative from stable 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,” Fitch said.

The agency added that the outlook revision was also a result of the “considerable uncertainty” around the economic and fiscal outlook, including the risks posed to economic recovery by ongoing financial tensions in the eurozone and against the backdrop of a still large structural budget deficit and high and rising government debt.

Fitch highlighted three triggers that could prompt a rating downgrade for the UK:

·         discretionary fiscal easing that resulted in government debt peaking later and higher than currently forecast;

·         adverse shocks that implied higher levels of government borrowing and debt than currently projected; and

·         a material downward revision of the assessment of the UK’s medium-term growth potential.

Fitch said the evolution of the eurozone crisis has “significant implications” for the UK because of the high level of trade and financial linkages the country has with the eurozone. The agency said the recent easing of eurozone tensions has diminished the risks to the UK, but added: “The crisis is not resolved and could once more intensify.”

Despite the negative comments, Fitch said it had affirmed the UK’s rating at AAA because of the progress made in reducing the government’s structural budget deficit and the credibility of the fiscal consolidation effort.