There has been another flurry of speculation in Westminster over the risks to the UK’s AAA rating. Britain is only being spared from a downgrade because the sovereign credit rating agencies expect the Tories to be elected, at least according to Fraser Nelson and others. It’s an interesting argument — so interesting that I thought it was worth asking the credit ratings agencies directly. Here is my Q&A with Brian Coulton, Head of EMEA Sovereign Ratings at Fitch.
Q: Is the expectation of a Conservative victory at the general election a significant factor in calculating the UK’s sovereign credit rating?
We are obviously aware that there will be an election next year but our capacity to forecast the election outcome would not be a sufficient basis to maintain a ‘AAA’ rating. We believe that fiscal policy objectives will be reorientated over the course of 2010 regardless of which government is in power.
Q: Is there a big enough difference between the Labour and Conservative spending plans for the election result to materially impact the Fitch stable rating outlook for the UK?
The judgement about the likelihood of a successful fiscal consolidation from 2011 which stabilises and reduces UK public debt ratios over the medium term will depend on a range of factors including the realism of economic forecasts, the actual details of spending and tax plans, as well as the overall parameters of the planned adjustment.
Q: Have either Labour or the Conservatives given Fitch analysts more information about their post-election spending plans than is available to the public?
Q: The Fitch stable rating is based on the government articulating “a stronger fiscal consolidation program next year”. Do you expect that to happen regardless of who wins the election?
Yes. As we get into 2010 the downside risk of deflation will be significantly diminished and fiscal policy goals are expected to shift from stabilisation towards consolidation. It is a feature of large AAA sovereigns like the UK – which have exceptional near term funding flexibility – that they can “sequence” fiscal policy goals in this manner and act in the near term to prevent an unnecessarily deep recession. But the re-orientation does need to happen during 2010.
Q: Is the likelihood of a hung parliament a factor in your calculations? Is it the election outcome that would most threaten the UK’s sovereign credit rating?
We detect a growing cross party consensus that fiscal adjustment needs to happen. A hung parliament could complicate the process of agreeing how this should be done but we do not believe it would lead to an impasse, unduly delaying the adjustment plans.