Fitch Ratings has delivered a serious blow to the credibility of the Government’s budget plans, warning that Britain risks a loss of investor confidence and erosion of its AAA rating unless it maps out clear austerity measures.
Brian Coulton, the agency’s head of sovereign ratings, said the UK has seen “the most rapid rise in the ratio of public debt to GDP of any AAA-rated country” and is courting fate with its leisurely plan to halve the deficit by the middle of the decade.
“It is frankly too slow, a pedestrian pace. Why the UK thinks it has more time than other countries , we’re not sure. This needs to be reoriented,” he told the Fitch forum on sovereign hotspots.
A string of European states are stepping up the pace of retrenchment, aiming to cut deficits to 3pc of GDP within three years. The risk is that Britain will soon stick out like a sore thumb, left behind with a shockingly large deficit long after such loose fiscal policy can be justified as a crisis measure. The UK deficit this year is 12.6pc of GDP, the highest among G10 states.
The Government is clearly counting on a “Korean” recovery, modelled on Korea’s fast return to trend growth following the Asian crisis in 1998. It relies on rising output and tax revenues to plug much of the deficit. “This is an optimistic assumption,” said Fitch.
There is a “distinct possibility” that Britain will face something closer to Japan’s ‘Lost Decade’ when a bursting debt bubble left the country on a permanently lower growth path. “The UK faces the same massive deleveraging by the private sector,” said Mr Coulton.
Separately, Fitch said it is too early to judge whether Greece can deliver on EU austerity demands once the social and political pain begins in earnest. “The first year is fiscally the easiest. Next year they have to cut another 3pc of GDP, and the following year a further 3pc,” said Chris Pryce, the agency’s Greece expert.
“The great question mark is whether the Papandreou government is going to conform. There is already dissent in the cabinet,” he said.
“Greece has an appalling record. Underneath this fiscal crisis is a failing political system. Politicians regard the public sector as a something to exploit for their own enrichment, but also for votes,” he said.
Fitch is not counting on an EU bail-out for Greece in assessing credit risk. While the EU game of ‘constructive ambiguity’ has succeeded in calming the markets, the agency noted that not a single “hard cent” has been put on the table so far. The outcome hangs on legal realities in Germany, not rhetoric from Brussels. “Even if German politicians wanted to bail out Greece, they know it would probably be overturned by Germany’s constitutional court,” said Mr Pryce.
Fitch said the risk of Greek contagion to Spain and Portugal has been exaggerated, but concerns about Italy may have been underplayed. While Italy avoided a financial and fiscal crisis, it started with high public debt and has seen the worst loss of export competitiveness of any EMU state. “The country that stands out is Italy. It has been losing world share for years but the market has not focused on it,” said the agency.
Few of the rich economies are in good fiscal shape. Their public debt is jumping from a two-decade average of 75pc of GDP to105pc by next year. Unlike the rising powers of Asia and Latin America, they have not built up a reserve buffer to absorb shocks. “Advanced economies haven’t self-insured, and that underscores the need for fiscal consolidation. Even a temporary loss of confidence can lead to financing problems,” said Fitch.
The paradox is that what may be good medicine for one fiscal sinner cannot be good for half the world economy simultaneously. If everybody tightens together, the global recovery may stall. The rating process itself risks becoming the enforcer of destructive debt deflation.
By Ambrose Evans-Pritchard
Published: 10:09PM GMT 09 Mar 2010
Source: The Telegraph