The Credit Factor: The UK’s credit rating downgraded
April 18, 2020
2 min read
What's going on here?
Credit rating agency Fitch has cut the UK’s credit rating from AA to AA-.
What does this mean?
Within 7 years, the UK’s top credit rating AAA has been cut 3 times, now down to AA- on Fitch’s rating scale. Giving reasons for the downgrade, Fitch cited both the impact of the coronavirus pandemic and looming Brexit outlook. In the wake of the coronavirus outbreak, Chancellor Rishi Sunak has planned to add £60bn of extra public spending to tackle the crisis, causing government debt to increase further. Fitch anticipated that the coronavirus outbreak will considerably weaken the UK’s public finances as it had already had concerns about Britain’s fiscal loosening stance before the pandemic.
What's the big picture effect?
A country’s credit rating takes into account all economic and political risks and therefore can be a fair indicator for investors before investing in the debt of that country (usually in the form of government bonds). Consequently, the downgrade is by no means good news for the UK government since investors will be discouraged to buy UK government bonds (gilts).
Nevertheless, the downgraded credit rating does not pose a significant threat to the UK government in the short term. Fitch’s rating of AA- is still much higher than junk status (lower than BBB-) which some investors, including pension funds, are essentially prohibited from holding. This means bonds issued by the UK government are still classed as “investment grade” and are still attractive to investors in the government bond markets with borrowing costs at a near all-time low. Moreover, as all economies across the world are being damaged by the pandemic, investors are aware that sovereign credit ratings everywhere are plummeting.
On the other hand, the downgrade displays various challenges the UK government will need to overcome to restore faith from credit rating agencies and especially investors. The coronavirus crisis has effectively delayed any progress of Brexit negotiations. Even after the coronavirus crisis passes, Brexit uncertainties must be addressed to reduce risks of significant disruption to UK economic and trade prospects that played a major part in downgrading the UK’s credit rating.
Report written by Long Dinh
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