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S&P Cuts UK Credit Outlook On Weak Economy, Fiscal Performance

S&P Cuts UK Credit Outlook On Weak Economy, Fiscal Performance
12/13/2012 11:26 PM ET

Standard and Poor's on Thursday cut the outlook on Britain's triple-A credit rating to 'negative', citing risks emanating from weak economic growth and rising general government debt.

Revising the outlook on the unsolicited long-term ratings to 'negative' from 'stable', S&P said there is a one-in-three chance that Britain could lose its top rating within the next two years, if the country's economic and fiscal performances weaken beyond current expectations.

Fitch Ratings and Moody's Investors Service already have the U.K.'s government debt rating on 'negative' outlook.

Speaking to lawmakers in Parliament's Treasury Select Committee on Thursday, Chancellor George Osborne said though Britain losing its AAA rating won't be a good thing, the credit rating status is only one test. "The ultimate test is what you can borrow money at," he said

S&P affirmed the country's long- and short-term unsolicited sovereign credit ratings at 'AAA/A-1+'. Meanwhile, the outlook on the 'AAA' long-term issuer credit ratings of the Bank of England was also cut to 'negative'.

"We now expect the United Kingdom's net general government debt as a percentage of GDP to continue to rise in 2015, before declining again," S&P said in a statement. At the same time, future employment or growth shocks could pressure government finances further.

"If economic growth recovers more slowly than we currently forecast," it could result in net general government debt approaching 100 percent of GDP from the current level of 85 percent of GDP in 2012, the agency said.

The government's efforts over the next few years to engineer the planned correction in the U.K.'s fiscal accounts would likely drag on economic growth, the report pointed out.

The government forecasts U.K. economy to grow 1.2 percent next year and 2 percent in 2014 after a 0.1 percent contraction this year. Osborne extended austerity by one extra year to 2017-18 after missing deficit reduction targets due to anemic economic recovery.

The economy exited a double-dip recession, with the gross domestic product growing 1 percent sequentially in the third quarter, ending three straight quarters of contraction. The rebound was largely boosted by the Olympic Games.

Domestic factors such as weak demand and fiscal consolidation along with waning economic performance by the U.K.'s main trading partners have posed challenges to a smooth economic recovery.

by RTT Staff Writer

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