Fitch Says U.K. Rating Most at Risk Among Top-Rated Nations

Fitch Says U.K. Rating Most at Risk Among Top-Rated Nations


Nov. 10 (Bloomberg) -- The U.K.’s sovereign credit rating is most at risk among top-rated nations, Fitch Ratings said, citing concern over the country’s budget deficit.

The rating faces risks because the U.K. needs “the largest budget adjustment,” David Riley, head of global sovereign ratings at Fitch, said in an e-mailed statement. “Our stable rating outlook reflected our expectation that the U.K. government will articulate a stronger fiscal consolidation program next year.”

Britain last month reported the biggest budget deficit for any September since records began in 1993 as the recession ravaged tax revenue and drove up welfare costs. The 14.8 billion-pound ($24.7 billion) shortfall compared with a deficit of 8.7 billion pounds a year earlier, the Office for National Statistics said in London on Oct. 20.

The pound dropped as much as 0.9 percent, the most since Oct. 23. Sterling touched $1.6602 before trading at $1.6644 as of 7:57 a.m. in London, from $1.6759 yesterday in New York.

“Many credit profiles of major ‘AAA’ sovereigns have been significantly weakened by the financial crisis and the subsequent recession,” Riley said in a separate statement. “The already out-sized budget deficits and the rise in government debt had reduced the ‘fiscal space’ for policy makers to respond to further adverse shocks.”

The U.S.’s rating also might be at risk of a review if its fiscal position does not stabilize in the next couple of years, Riley was reported by Reuters as saying in a television interview.

Standard & Poor’s lowered the outlook on the U.K.’s AAA rating to “negative” from “stable” on May 21, citing the country’s rising debt burden.

Credit-Default Swaps

The cost of hedging against losses on U.K. government bonds through credit-default swaps widened to 55 basis points today, the most since Sept. 8, according to data compiled by Bloomberg.

A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to adhere to its debt agreements.

Greece’s credit rating was cut one step to A- by Fitch Ratings on Oct. 22 after the country increased estimates for its budget deficit. The outlook is “negative,” meaning the next move is more likely to be lower.

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