Friday, 24 April 2009

British government's credit rating at risk

How long can the UK government hold onto its AAA credit rating (or Aaa if you're a Moody fan)?

Have a look at this table for government budgets for the last few years.

The desperately bad state of our finances should leap out at you. Borrowing, which has been a constant theme of Labour's administration, has lurched out of control - this year it is projected to be FOUR TIMES last year's budgeted amount. Meanwhile government revenue is expected to fall to an amount not seen since 2005.

These are not the numbers you would expect of a AAA rated organisation and many commentators are expecting a downgrade.

What happens then?

Well, the government's borrowing gets slightly more expensive. However that isn't the real problem. The real problem is that most buyers of AAA debt do so because they are legally required to do so, for example pension funds typically hold 40% to 50% of their assets in AAA bonds and not only could they not buy more government debt if the UK is downgraded, they would have to dispose of what they have.

This would severely limit the government's ability to sell bonds and they would have to raise interest rates to make them more attractive to those buyers still allowed to buy them. The possibility even exists that HMG would fail to sell enough bonds and simply run out of money. Then they would either seek an emergency loan from the IMF, or attempt to print money, ie, the Treasury would sell bonds directly to the Bank of England which would pay using money created out of thin air. However, this would be both hyperinflationary and illegal under the Maastrict Treaty.

What's really needed is a radical cut in government spending. Gordon Brown and Alistair Darling don't seem to have the stomach for that.

1 comment:

Bertie Humbug's Ranto-O-Matic said...

Of course they dont have the stomach for it, so much Government spending supports their own clients such as public sector union members, undeserving benefits claimants and so on.

Meanwhile of course reduction in the SSA to non Labour councils in the South East mean that councils have to cut into services.

Labour suck. A lot.