Would a credit downgrade signal the end of Coalition credibility?

[pap]

There have been numerous rumblings over the past week about a potential downgrade of Britain's credit rating. Numerous organs of the press reported that Moodys were considering Britain's AAA status, citing a negative outlook for the country amongst its reasons for new thinking [Indy article from yesterday].

 

The rhetoric out of the Coalition government has been mighty on this issue. Unemployment at highest levels for a generation? It's ok! We have a triple A credit rating. Negative growth and the chances of a double dip-recession? Triple A credit rating will save the day.

 

In short, the current Coalition government has placed a great deal of stock in its retention of favourable borrowing costs, using it as an indicator that Government policy is doing the correct job, even though the facts on the ground show something completely different (158Bn of unplanned borrowing, anyone?).

 

We now look likely to lose triple AAA status in the short to medium term. If this happens, does the Coalition have any credibility left on economic matters?

[Saintandy666]

I doubt it. The lib dems wouldn't abandon the conservatives because A. They aren't in a good place and B. they've stuck thick and thin through a lot so far, I think they are in for the long run. And they support coalition governments, so they want this one to work.

 

I don't think the Tories would leave either; at the moment, many prefer coalition as it means they can keep their nutty right quiet(though signs this is changing last few months??) and polls are showing even stevens at the moment and I don't think the tories would win an election. David Cameron just isn't that popular, however unpopular Miliband is, hence why he couldn't even win an election against Gordon Brown, the most unpopular PM perhaps ever.

 

I think the Coalition is probably here to stay until the end of 2014 when the parties will start to split up in order to differentiate themselves before the next election.

 

Could be wrong mind... in my opinion, it depends how far the Lib Dems can be pushed before saying 'no more'. They've put up with a lot so far, but they are seeing many of their policies installed so we will see.

[pap]

Great answer to a different question, Andy

 

Forgive me if I didn't make myself clear ( I probably didn't ), but I was referring to the credibility of the Coalition, rather than the chances of it breaking up. I do agree that the two issues are linked at the hip.

 

I happen to agree with a lot of what you say here, but surely it is credibility from the public that matters. The AAA credit rating is in many ways, the Coalition's stake in the ground, parroted out again and again as the indicator of how well they're doing. Take that away, and what 'successes' does this Government have to draw on?

[trousers]

Would a credit downgrade signal the end of Coalition credibility?

 

No.

[pap]

No.

 

Short and sweet from a (presumed) supporter of the current set-up.

 

Would sir care to qualify his opinion? In most things, assessing whether someone is doing a good job involves weighing up their performance, good or bad.

 

What have the Conservatives done to tip the balance to secure the trousers' seal of approval?

[Kingsland Codger]

We now look likely to lose triple AAA status in the short to medium term. If this happens, does the Coalition have any credibility left on economic matters?

 

Do we look likely to lost the AAA status? As I understand it, Moody's have put the UK on a 'negative outlook' - which means there is a 30% chance of losing the triple A status in the next 18 months.

 

Which is not the same as the UK "looking likely to lost triple AA status in the short to medium term", is it?

 

The link from the BBC business section of their wesbite is useful, with Stephanie Flanders giving a clear comment on the audio link

 

http://www.bbc.co.uk/news/business-17022631

 

We were on a 'negative watch' before and didn't lose our rating, so just because Moodys have put us on 'negative outlook' it doesn't mean a downgrade is going to happen.

 

More worryingly is how a ratings agency (owned by whom? reporting to where?) appears to be in a position to cause a change of government in many countries.

Edited 20 February, 2012 by Kingsland Codger

[OldNick]

Short and sweet from a (presumed) supporter of the current set-up.

 

Would sir care to qualify his opinion? In most things, assessing whether someone is doing a good job involves weighing up their performance, good or bad.

 

What have the Conservatives done to tip the balance to secure the trousers' seal of approval?

the reason for the possible down grade from Moodys is mainly due to the Greek debt and how that is going to effect us due to the amount of business we do with Europe. We have to hold our nerve and keep to the measures we are using to cut our debt. Greece are the Pompey of europe

[pap]

Thanks for the clarification on what a negative outlook actually means, Kingsland Codger.

 

We can dispute the 30% ( I happen to think it slightly higher ), but that's almost a 1/3 chance of getting downgraded. You are quite right to pull me up on the fact that even that doesn't necessarily constitute "likely", and I'm more than happy to be proved wrong by events.

 

My personal view is that we're not doing enough to generate growth, and though I fully expect the economy to receive a bump from the spectacle of the Olympics, its difficult to see how growth will be achieved over the long term. Indeed, there is a piece in the FT Adviser today, calling for radical growth strategies. Quote:-

 

Ruth Lea, economic adviser to the Arbuthnot Banking Group, said Moody’s change of Britain’s credit outlook from stable to negative implies that Britain has a one in three chance of a formal downgrade of its coveted triple-A credit rating over the next 12-18 months.

 

Moody’s stated that the key drivers of the reassessment were the increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks “skewed to the downside”.

 

It claimed that any further abrupt economic or fiscal deterioration would put into question the government’s ability to place the debt burden on a downward trajectory by 2015-2016.

 

Although the UK is outside the euro area, Moody’s also said the high risk of further shocks within the currency union were exerting negative pressure on the UK’s rating given the country’s trade and financial links within the euro area.

 

Ms Lea said: “Moody’s endorsed the fiscal austerity programme of the Chancellor, who has very little fiscal wriggle room in the forthcoming Budget [21 March].”

 

So essentially, our present rating is based on us adhering to our plans (already shot by 158Bn) and not making a great deal of change in March's budget. Problem is, we're already seeing the problems caused by taking money out of the economy - one of those is a lack of growth.

 

If we need growth to escape our current financial predicament, yet have no mechanism to generate such growth, I'd argue that a 1/3 chance of being downgraded is optimistic. Many opposition politicians would agree.

[Lord Duckhunter]

It's not so much the downgrade (if it happens) but the cost of borrowing money. America was downgraded from AAA to AA in 2011 and they are still able to borrow money very cheaply. Moody’s endorsed the government’s austerity programme and warned that failure to stick to the deficit reduction plan would make matters worse. It is the uncertainty in Europe that has prompted this warning, nothing to do with Govt policy, so there is no threat to their credibility. Politicans spin the ratings agencies views too much, they are opinions about what may happen and I dont recall any predicting the melt down.

[OldNick]

Well if you listen to Prescott he says spend, of course the years under labour we did so and look what has happened. You can only spend on a credit card so long before you have to do something. We as a nation did so, and are now having to cut our cloth accordingly.

Until we get our export earnings up and earn more than we spend we will be in this position. As the developing world take more of our markets we will suffer even more, we need to take the medicine and get on and lose the debt burden. it will be a disaster if we lose our credit rating as it will cost the treasury more to borrow and so the purse will have less in it to spend. That is why we have to carry on cutting.

[Saintandy666]

Oh wow, I should probably properly read posts before replying in future!

 

I don't think it is the end of their credibility at all. If they can get unemployment down, and growth up, I don't think anyone will care about what the ratings agencies say. But of course, it's hard to do that if bond yields are up, and so no stimulus can be provided and debt just increases.

 

The credibility of the coalition won't depend on credit rating agencies in my opinion, most people don't know or care about them. It'll depend on how they see their own personal economic surroundings of family, friends and hometown.

[Doctoroncall]

If this happens, does the Coalition have any credibility left on economic matters?

 

But surely, the first thing to establish is when has any government had any credibility on economic matters? Has government policy actually made such an impact to change the economical outlook of a country (either way)?

[pap]

But surely, the first thing to establish is when has any government had any credibility on economic matters? Has government policy actually made such an impact to change the economical outlook of a country (either way)?

 

I think so, yes. I accept that all Governments are, to an extent, participants in the larger economic system and that there are understandably things outside of their control. That doesn't mean that the policies that they make on a local level don't have an impact.

 

Equally, there are governments who have made much better use of their resources, and do not have the same problems that we do. The Scottish nationalists are currently looking at Norway as a model for their own financial sustainability. Why? Because with a broadly similar set-up to Scotland, Norway has contrived a way to make themselves debt-free by using the profits of their natural resources for the good of the economy. I accept that Norway is not the UK, and may not even be that comparable to Scotland. However, there's no mistaking that their government can claim a lot of economic credibility for the country's rude financial health.

 

So while you raise a good point - that we haven't had many governments that you could call economically credible, that doesn't mean that it is not possible. And as I've said before, the Coalition has stated the importance of the AAA credit rating time and time again. That being the case, isn't is reasonable to question their credibility if and when they fail on one of their key claims?

[alpine_saint]

There have been numerous rumblings over the past week about a potential downgrade of Britain's credit rating. Numerous organs of the press reported that Moodys were considering Britain's AAA status, citing a negative outlook for the country amongst its reasons for new thinking [Indy article from yesterday].

 

The rhetoric out of the Coalition government has been mighty on this issue. Unemployment at highest levels for a generation? It's ok! We have a triple A credit rating. Negative growth and the chances of a double dip-recession? Triple A credit rating will save the day.

 

In short, the current Coalition government has placed a great deal of stock in its retention of favourable borrowing costs, using it as an indicator that Government policy is doing the correct job, even though the facts on the ground show something completely different (158Bn of unplanned borrowing, anyone?).

 

We now look likely to lose triple AAA status in the short to medium term. If this happens, does the Coalition have any credibility left on economic matters?

 

The Tories do, not sure the LibDems do...

 

BTW, as much as I am sure you are wetting yourself in excitement, its patently obvious that the UKs credit rating is not completely under the control of the UK Government. The Coallition can do all the right things and make all the right noises for S & P and Moody's, but if the credit rating for France, taking an example of a country which has borrowed a lot from UK banks, slips much more, it could pull down the UK's rating by association.

[pap]

The Tories do, not sure the LibDems do...

 

BTW, as much as I am sure you are wetting yourself in excitement, its patently obvious that the UKs credit rating is not completely under the control of the UK Government. The Coallition can do all the right things and make all the right noises for S & P and Moody's, but if the credit rating for France, taking an example of a country which has borrowed a lot from UK banks, slips much more, it could pull down the UK's rating by association.

 

I don't think that anyone is making the case that the UK Government is working in isolation on its credit rating. If it was, then we could just give ourselves a great credit rating and be done with it

 

Thing is, the Coalition hasn't been doing the right things. Economic targets have been missed, and a great deal of energy is going into initiatives such as the top-down reorganisation of the NHS, which wasn't anything anybody voted for.

 

Further, while I'm happy to concede that the Government is not working in isolation, it does have power over the things it says and I daresay, a lot more information about external factors which might affect the things they say. It seems to me that this is the one promise they've not yet broken and that the cost of keeping this promise has exacted a heavy toll on those affected by the cuts. Indeed, the government holds up the AAA rating as a reason why these cuts are justified.

 

Credibility is a very simple issue at heart:-

 

Do we trust what is being said?

 

The Coalition government, external factors and all, has said time and time again that we will retain our AAA status, and that they have a plan to ensure this happens. Surely it's valid to question a government's credibility and its plans if and when they fall short of their stated aims.

[Lord Duckhunter]

As I posted earlier the USA's credit was downgraded but their cost of borrowing remained the same. It is the cost that we borrow our money at that will determine the Govt's credibility, not the ratings agencies opinion of what the cost maybe.

[pap]

As I posted earlier the USA's credit was downgraded but their cost of borrowing remained the same. It is the cost that we borrow our money at that will determine the Govt's credibility, not the ratings agencies opinion of what the cost maybe.

 

To me the issue is somewhat simpler.

 

Credibility is surely a measurement of whether the things you do match the things you say.

[Lord Duckhunter]

To me the issue is somewhat simpler.

 

Credibility is surely a measurement of whether the things you do match the things you say.

 

And if they manage to keep borrowing money at historicly low rates, they'd have done what they said they would. America lost it's AAA rating and it was much ado about nothing. The rates we can borrow money at does not depend on our rating, that is just an opinion. With the problems in Europe I suspect that we will be a safe haven for a long time, provided we stick to a clear credible plan.

[pap]

And if they manage to keep borrowing money at historicly low rates, they'd have done what they said they would. America lost it's AAA rating and it was much ado about nothing. The rates we can borrow money at does not depend on our rating, that is just an opinion. With the problems in Europe I suspect that we will be a safe haven for a long time, provided we stick to a clear credible plan.

 

I take your point, Lord D - but I'm always wary of comparisons between the UK and the US. The US is unique. I think we can both agree that economically, it carries a LOT of debt. Indeed, we had the little non-story about the debt ceiling not being raised last year. However, it's also the most powerful military force on this planet, and I suspect that it gets a lot of leeway based on this fact alone. Despite all that, there is still a tremendous amount of confidence that the US will emerge from this, in a way that is not present with some of the other nations beleaguered by their debt levels.

 

I appreciate the clarification you've provided, and would be very interested to hear what Window Cleaner has to say on the issue. France has recently been downgraded and despite the fact that it is perhaps too early to assess the impact on the French economy, the comparison is perhaps more meaningful than one between the UK and the US.

[Seaford Saint]

Not too sure what the UKs actual debt is....it is more than we are told, I am sure. The coalition are doing what they can by cutting out unecessary spend etc but this was never going to lead to growth (or at least any significant growth)

 

We have borrowed too much the growth we had was fuelled in part by people taking equity out of our homes etc and wasn't sustainable. There is a 2 to 3 year lag and then MAYBE things will change and there will be growth....its not guaranteed though.

 

That's my take.

[alpine_saint]

I don't think that anyone is making the case that the UK Government is working in isolation on its credit rating. If it was, then we could just give ourselves a great credit rating and be done with it

 

Thing is, the Coalition hasn't been doing the right things. Economic targets have been missed, and a great deal of energy is going into initiatives such as the top-down reorganisation of the NHS, which wasn't anything anybody voted for.

 

Further, while I'm happy to concede that the Government is not working in isolation, it does have power over the things it says and I daresay, a lot more information about external factors which might affect the things they say. It seems to me that this is the one promise they've not yet broken and that the cost of keeping this promise has exacted a heavy toll on those affected by the cuts. Indeed, the government holds up the AAA rating as a reason why these cuts are justified.

 

Credibility is a very simple issue at heart:-

 

Do we trust what is being said?

 

The Coalition government, external factors and all, has said time and time again that we will retain our AAA status, and that they have a plan to ensure this happens. Surely it's valid to question a government's credibility and its plans if and when they fall short of their stated aims.

 

The credit rating is hugely important. If it goes down, Government borrowing costs more (the UK governement has to pay more interest). That means all its financial planning and budgeting, already under massive stress to stay in-plan, goes further askew. It seems to be a reasonable principle the coallition is arguing, that in as far as they can control such matters, their budget for reducing national debt is dependent on their spending plans and retaining the AAA credit rating.

 

I am of the opinion, although I am no fan of the coallition, that everything that can be done, is being done. So I still trust it - just about. Though if I were Cameron and Osbourne, I wouldnt turn my back on Clegg, Hughes, Cable and Huhne.