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Britain loses AAA credit rating
Question of the Day
Britain on Friday became the latest major developed country to lose its top AAA credit rating, following a downgrade issued by Fitch, a London-based ratings agency.
Moody’s already had downgraded Britain from AAA in February, leaving only one major credit rater — Standard & Poor’s Corp. — that still gives its top rating to the struggling nation, which has accumulated overwhelming debts amidst a prolonged economic downturn.
The Fitch downgrade comes as a blow to the conservative government in Britain, which gave top priority to maintaining the government’s sterling rating when it took office. Despite its aggressive efforts to curb spending and whittle down the debt, however, the government has been hamstrung by a chronically weak economy.
“The fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a ‘AAA’ rating,” Fitch said in cutting the U.K.’s rating to AA-plus. It noted that Britain derives considerable flexibility to finance its debts because the pound sterling is used as a reserve currency around the world and much of its debt is locked up in long-term bond issues.
However, lagging growth has caused the country’s debt recently to mount to nearly 100 percent of economic output, putting Britain in a class of heavily indebted countries which are destined to struggle with their debts for years. Most nations with AAA ratings have debt only about half that size.
“Fitch’s move is another slap in the face for the government — particularly as [Chancellor of the Exchequer George Osborne] made keeping the AAA rating a key focus for the UK’s fiscal austerity prioritization as soon as the government came to power in the summer of 2010,” said Howard Archer, economist with IHS Global Insight.
“While the government appeared to place less emphasis on the importance of the AAA rating in recent times as the threat to it mounted, it cannot hide the fact that its maintenance was a clear target from the outset of its term in office.”
Economists say the Britain’s experience — like that of other European countries — shows that a rigorous program of austerity to reduce the debt is not enough to prevent a worsening of the debt if it ends up plunging the economy further into recession.
To the contrary, a growing economy that produces ever more revenue for the government is the prerequisite for most countries to conquer their debt problems, economists say.
Political leaders in the U.S., contending with quickly mounting debts like Britain’s, have argued strenuously over the importance of growth versus debt reduction. The U.S. also is in danger of losing its AAA rating from Fitch and Moody’s after having already been downgraded a notch by S&P in 2011.
President Obama frequently points out that overly aggressive measures to cut spending while the economy is still weak will only backfire and make the debt problems worse. His budget includes additional short-term stimulus such as infrastructure funding for the economy while pushing off the greatest debt reduction to future years.
Republicans, echoing the conservative government in Britain, have placed greater emphasis on quickly reducing the debt, and have proposed deep spending cuts aimed at balancing the budget while seeking to promote growth through tax reform.
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