Why has the UK been downgraded?

Submitted by Matthew on 6 March, 2013 - 10:55

What are the UK government credit ratings which were recently downgraded?

A bit like your personal credit ratings which decide whether you get a mortgage or a credit card or a bank loan.

But government’s (and big corporations) credit ratings are published, and they are not yes/no ratings, but a long scale from AAA (top rating) downwards.

What are the consequences of the downgrade?

Many other countries, including the mighty USA, have been marked down from AAA, and can still sell their bonds (IOUs) without trouble.

A drastic downgrade would matter economically, because banks are often constrained by rules to keep a certain proportion of assets in the form of highly-rated bonds. But a small downgrade like the UK’s has small economic consequences.

Politically, the consequences are bigger. George Osborne made a big deal of his “success” in keeping Britain’s AAA rating. He is now discredited.

What are the credit rating agencies?

There are three main agencies, Standard & Poor’s, Fitch, and Moody’s, all US-based. They are paid by governments and corporations to give a rating to their bonds.

The agencies were discredited in 2007-9 when mortgage-based and other bonds which they had rated highly turned out to be junk.

However, the reasons for downgrading UK bonds are clear enough. Despite all the government’s talk, the British government’s debt is increasing, and its annual deficit (the amount added onto the debt each year) is probably increasing too.

There is little chance of the British government not making payments due on its bonds. If it comes to it it can just print more pounds. However, there is some risk that Britain’s economic crisis might worsen relative to other countries’, and that financiers wanting to sell British bonds quickly might be able to do so only at a loss.

How can the debt and the deficit be increasing if the government is making so many cuts?

By making cuts, the government is pushing the whole economy down. As a result, its tax income decreases. Some welfare spending increases even despite cuts in benefit rates.

What do socialists say?

The “Keynesian” answer of increasing, rather than cutting, government spending would probably improve things.

That worked in Britain after 1945 (when the government’s debt was much bigger than now). It may work in Japan (where a new and quite right-wing government is trying it).

The immediate hitch is that Britain depends heavily on selling its bonds (IOUs) in international financial markets. Britain in 1945, and Japan now, have a much bigger proportion of their bonds held by banks and other institutions within the country which can’t or won’t dump them to buy other countries’ bonds instead.

The international financiers might respond to increased public spending by panicking and dumping British bonds. If they did that, even on economic calculations which were “wrong” to start with, they would then make those calculations “right” by crashing the prices of British bonds and making it harder and more expensive for the British government to borrow.

Fear of the financiers is probably the reason why Ed Balls, who argued the “Keynesian” line strongly in 2010, has become more and more mumbly about it the more his argument is vindicated.

The answer is to expropriate the financiers — preferably through an integrated European scheme of public ownership and democratic control, failing that country by country.

Add new comment

This website uses cookies, you can find out more and set your preferences here.
By continuing to use this website, you agree to our Privacy Policy and Terms & Conditions.