UK's Credit Rating Downgraded. Tories: "More austerity!"

[Zaune]

The Guardian

The chancellor has insisted that he will not change course despite the downgrade of Britain's credit rating in which he invested great political capital in maintaining.

George Osborne said Britain's situation would get very much worse if the government changed course after Moody's changed Britain's rating from AAA to AA1. The chancellor said previously the rating agency's triple-A rating was an endorsement of his austerity policies.

As far back as February 2010, he told an audience of Tory activists: "What investor is going to come to the UK when they fear a downgrade of our credit rating and a collapse of confidence?" In the Tory manifesto, published weeks later, he said: "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a parliament."

Ed Balls ,the shadow chancellor, described the downgrade as a "humiliating blow" for Osborne who was "ploughing on regardless with a plan which is not working".

In an interview at 11 Downing Street on Saturday, Osborne said: "I think we've got a very clear message, a loud and clear message that Britain cannot let up in dealing with its debts, dealing with its problems, cannot let up in making sure that Britain can pay its way in the world.

"What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it."

Labour insisted the government had withdrawn demand from the economy which had slowed growth and increased the debt.

Balls said: "The chancellor said this [a credit agency downgrade] would be a humiliating blow and the first test of his policy was to avoid it, so clearly for him politically, it is a very, very bad moment.

"What the credit rating agencies are doing, though, is reflecting the reality and the reality is an economy which is not growing, a deficit which is getting bigger, families in real stress and a government which is ploughing on regardless with a plan which is not working – saying 'The medicine is not working, let's increase the dose of the medicine.' That is completely crazy economics."

Asked if he had broken his commitment to protect Britain's credit rating, Osborne said: "I've consistently argued that Britain has a debt and deficit problem, that we've got to tackle that head on, that we've got to take tough measures to do that and I think people understand that.

"In the end, the test of our credibility as a country is there every day in the markets when we borrow money on behalf of this country from investors all around the world. At the moment we can do that very cheaply with very low interest rates precisely because people have confidence that we have got a plan, we've got to stick to that plan and we are going to deliver that plan. What do they also say? That if we abandon our commitment to deal with that debt problem, then our situation would get very much worse and I'm absolutely clear that we must not do that."

Moody's warned that "subdued" growth prospects and a "high and rising debt burden" were weighing on the economy. It said it now expects the "period of sluggish growth" to "extend into the second half of the decade".

"The main driver underpinning Moody's decision to downgrade the UK's government bond rating to AA1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public and private sector deleveraging process," the agency said.

However, the main impact could be political for Osborne, as rates paid by the US fell after Standard & Poor's reduced its credit score in 2011.

The chancellor's deputy, Danny Alexander, the Lib Dem chief secretary to the Treasury, played down the news. He said: "Of course this is disappointing news, but I have always said that the credit rating agencies are not the be all and end all. What in the end matters is the confidence that people who invest in this country have.

"We still command very low interest rates, historically low interest rates. This country has reduced its deficit by a quarter over the past two and a half years. Over a million jobs have been created in the private sector."

This quarter is crucial for the chancellor if the country is to avoid a triple-dip recession following the 2008 banking crisis which led to sharp reductions in growth in early 2009.

The economy contracted by a surprise 0.3% in the last three months of 2012 and if it shrinks again in the subsequent three months it would be regarded as once again in recession. Employment, though, ended 2012 at 29.7m – the highest number of people in work since records began in 1971.

You know, I'm almost starting to feel sorry for the guy. It's not a crime to have been wrong, George. Nobody will think less of you for admitting that you tried it, but it didn't work; quite the reverse in fact, and there's still two years to salvage the situation.

[SirNitram]

Austerity, like Conservatism and Communism, can never fail. It can only BE failed.

[Irbis]

What makes his attempts to appease rating agencies even more sad (and pathetic) is the fact no one even considers them working correctly anymore. In fact, we just saw first government 5 billion $ lawsuit against them. I wonder when Europe will grow a pair and sue them for all the crap they produced in EU, too?

[J]

Default. Government and household debts are still manageable but the rest has to go.

[Starglider]

Default. Government and household debts are still manageable but the rest has to go.

Government debt is effectively never invested in capital. Household debt is either for consumption or illiquid capital (property). Industrial debt may be for capital items, or may be for unproductive activity such as management buyouts and share buybacks. Financial debt on the other hand is all used to fund purchase of assets, most of them quite liquid, and all expected to earn more than the cost of servicing the debt. As such financial debt is not subject to the same kind of insolvency spiral due to consumptive spending that governments and households experience. It has a different set of risks; investments (e.g. loans) turning out to be higher risk / lower return than expected and global financial system lockup removing general liquidity. These risks are of course very serious but it generally does not make sense to include financial debt in an assessment of national solvency, except where zombie banks are so far gone that a government bailout is a certainty (in which case their solvency gap is effectively government debt).

With regard to the credit rating downgrade, it is of course overdue and had Labour been in power, it would have happened about 12 months sooner. I do agree with J that the best the Conservatives can do is delay disaster (and benefit from safe haven status as much as possible when the Eurozone implodes).

[madd0ct0r]

Default. Government and household debts are still manageable but the rest has to go.

Government debt is effectively never invested in capital.

What about large infrastructure projects - hoover dam, the rail network ect?

[Zaune]

With regard to the credit rating downgrade, it is of course overdue and had Labour been in power, it would have happened about 12 months sooner. I do agree with J that the best the Conservatives can do is delay disaster (and benefit from safe haven status as much as possible when the Eurozone implodes).

Assuming of course that we don't implode, which is quite likely to happen if we don't either bring unemployment back down under 5% or throw up our hands and give this Universal Credit thing a try.

[Irbis]

What about large infrastructure projects - hoover dam, the rail network ect?

That's communism and as such is called evil ipso facto and ignored as an argument, of course.

[madd0ct0r]

it can be very good buisness. Investing $2billion to increase the economy by $5billion is a pretty good investment.

[Simon_Jester]

Default. Government and household debts are still manageable but the rest has to go.

Government debt is effectively never invested in capital.

What about large infrastructure projects - hoover dam, the rail network ect?

Or for that matter educating the workforce? Or funding programs that prevent 1.5 dollars in damage from crime down the road for every dollar spent on the program?

[madd0ct0r]

You know, I'm almost starting to feel sorry for the guy. It's not a crime to have been wrong, George. Nobody will think less of you for admitting that you tried it, but it didn't work; quite the reverse in fact, and there's still two years to salvage the situation.

Was he wrong?

employment is up, the pound is crashing back to parity with the euro and manufacturing has a chance for the first time in a while.
It almost makes more sense then a government fueled by taxes on the global money exchange siphonning system that is Canary Wharf.