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?

No.

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.

The Infrastructure Planning Commission is much more important than it sounds.

Depending on your point of view, it is either a] an undemocratic body which will impose unwelcome nuclear power stations and wind farms on unhappy villagers or b] the only way to prevent the lights going out in 10 years’ time.

One day it could be a case study in utilitarianism. Who should have the final say - the small minority or the big majority?

It’s a major issue because the IPC is about to start work. But the Tories would scrap it next year. Their argument is that such schemes can get built; companies just need to work harder to turn “nimbies” into supporters.

The counter-argument is that time is running out. Ironically, it was Greg Clark in the chamber this afternoon who kept repeating the phrase: “Why did they leave it so late?“. (A report this summer suggested power outages by 2017 the way things are going).

Well yes, it is Labour’s fault that we are in this situation. The dirtiest coal power stations will have to be closed in the run-up to 2015. Many nuclear power stations have less than a decade before they are wound down. And still UK renewables lag behind all EU countries bar Malta and Luxembourg (as this blog has mentioned before).

But if the British public won’t embrace more power - while demanding 24/7 energy supplies - surely the time has come for some form of compulsion? Even if that means angering environmental groups* and others? On this Labour seems to have a more practical policy than the Tories.

Ed Miliband, energy secretary, tried to make the case, gingerly, this afternoon: “Saying no everywhere will not be in the national interest,” he said.

The Tory approach is to let the secretary of state make individual rulings on schemes - subject to today’s national policy statements, released by the secretary of state. Therein could lie the potential for even more judicial reviews.

There is no doubt that business groups are worried about the Tory policy, as my colleagues wrote here.

The Institute of Directors said today:

“The establishment of the Infrastructure Planning Commission and the consultations on today’s national policy statements are important steps towards reducing these costly delays while preserving the democratic accountability that is properly part of the planning process. Now that the new regime is getting under way, it is important that nothing should be done to hinder the IPC’s ability to deliver quicker decisions on key infrastructure projects.”

*I know that Friends of the Earth and others want a more democratic system. But if the IPC delivers much-needed wind farms isn’t that the better of two evils?

So many numbers are flying around that you might not have spotted today’s real news on RBS.

That is, the government has wiped the slate of an estimated £9-£11bn of tax liabilities owed by the giant bank.

In private Treasury officials suggest that the figure is closer to £4.5bn. But the larger figure has come from RBS’s own accounts.

So, not only is the government pumping £25bn of new capital into RBS (as first announced in February). It’s also buying £6bn of new shares in Lloyds Banking Group as part of LBG’s private fund-raising. And it’s creating a contingency rescue fund of £8bn for RBS (which may never be used). Plus the £10bn tax write-off.

That’s close to £50bn of taxpayers’ money.

The Treasury’s defence is a] a lot of the money was announced in the spring, b] RBS will take on more onerous terms such as taking a bigger “first hit” of any losses and c] would your rather let the bank collapse and prompt another financial meltdown?

Even so: These are big numbers. John McFall, chair of the Treasury select committee, told the Commons: “RBS is in a worse state than everyone thought last February.”

Brian Groom, FT business editor, assesses the reaction of business to the conference after a year of financial crisis.

Follow the link below: Continue reading "FT video: What does business make of the conference?"

Okay, it’s not the same Fred Goodwin. This one works as an analyst at Nomura, apparently.

But the Tories have seized upon Goodwin’s report which suggests “the prospect of a UK fiscal crisis is a clear and present danger”. The report suggests that a fiscal crisis is “far more likely” in the UK than in the US - because the dollar is a reserve currency.

“The UK fiscal dynamics are unsustainable. The fiscal balance is plunging deeply into the red in a spectacular and frightening way. Who will fund it? Without QE (quantative easing) the possibility of failed auctions is not trivial.”

Apparently the government’s mega-programme of gilt issuance (selling bonds) has not yet been fully tested - because it has been exceeded by QE (buying bonds).*

When the government turns net seller we will see whether there truly is a market appetite for UK gilts.

George Osborne described the Nomura report as a “wake-up call” with Britain’s “international reputation” at stake. Privately, however, the Tories must be as worried as the government is - given that the situation may still be with us in eight months.

UPDATE

The exact figures are as follows:

* As of September 10 there has been £145bn of QE (assets purchased by the creation of central bank reserves), of which £143bn has been gilts. The process began on March 11.

* Since that date the Debt Management Office has sold £95bn of gilts.

He finally said it. There will be cuts. But Gordon Brown waited until he was nearly half an hour into his speech to admit it. (Bottom of page 7 out of 8).

And he wedged the stuff about deficit, hard choices, sustainable finances, cutting costs into a handful of paragraphs. The rest of the speech was the usual glorious talk about saving the global economy, the national economy and the range of initiatives which Labour has thrown out in the last year. And - to be fair - there were two genuinely big policy pledges.

More paternity leave and the swift implementation* of the temporary workers directive will please unions and, you’d have thought, workers. The business lobby might not be so happy but neither concept is exactly a surprise (the only question on the directive was its exact timing).

*UPDATE

My eagle-eyed colleague Jean Eaglesham points out that the government is only putting the temporary workers directive on the statute book in the next Parliamentary year. This is not the same as the implementation date. We still don’t know when that is going to be. In other words, this may not be much of a gift to the unions (and temps) as it sounded at first.

I suspect this quote by Brendan Barber may appear in tomorrow’s headlines:

“Last time we suffered slash and burn economics we had riots in the streets here in Liverpool. I make no prediction that this would happen again, but it would take us back to the days of a deep North-South divide and once again hollow out whole areas of the economy.”

In an earlier blog today I described how rising unemployment could stop the (GDP) recovery feeling like a recovery.

Throwing out statistics about how the technical recession may have ended could provide little solace to those who have lost their jobs.

Expectations are for a Gordon Brown “recovery” speech on Tuesday when he faces the TUC Conference in Liverpool.

For all the (slightly) better economic/financial data out there, there is still an obvious dichotomy that Britain faces. Do you define the downturn by GDP figures (the formal definition of recession beging two quarters of contraction) or on unemployment figures?

With the dole queue set to grow for years to come, it’s a vital question.

Brendan Barber, head of the TUC, made the point this morning on the BBC’s Politics Show:

I don’t think that’s a real recovery until we begin to see unemployment coming down, and I fear that we, we’re a long way off that.

Alan Johnson was on similar ground, albeit in a slightly garbled way:

I don’t think we’re through the worst of the recession, I, I mean it’s a matter, I think Alistair Darling has led us through this, with Gordon Brown, in, in, absolutely calling every single turn of this the right way. When, when we look at this now, there.. I don’t think we can say that we won’t get any more bad labour market figures, I don’t think we can say that we’re in a situation now where manufacturing is going to recover completely, what we can say, I think, is we’ve seen the early signs, in the construction industry, in consumer confidence, in my own constituency here we’ve seen that the, that the increase in unemployment has kind of levelled off. Now I’d like to think that’s the early signs, but I think there’s a long way to go and what I think the British public need to do as we approach the next Election is listen to the various … plans of the parties for how to get through this…

Of course, no minister wants to prematurely call the recovery. Spotting green shoots is a risky business, as Baroness Vadera found out earlier this year.

Precisely how Mr Brown will address this question on Tuesday will be fascinating to watch. I suspect there will be more rather more about how Labour prevented a financial catastrophe than premature optimism about the imminent future.

According to Sky the speech will include this:

Today we are on a road towards recovery - but things are still fragile not automatic and the recovery needs to be nurtured. People’s livelihoods and homes and savings are still hanging in the balance, and so today I say to you: don’t put the recovery at risk.

“Road towards recovery” is a phrase which covers all options pretty well. It could be a swift road - but also a long and winding one with many potential setbacks etc etc