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By Rebecca Clancy | Published Jun 28, 2012

M&G’s Leaviss: UK rating downgrade increasingly likely

The UK is increasingly likely to lose its top ‘AAA’ sovereign credit rating, M&G Investments’ bond head Jim Leaviss has warned.

M&G’s head of retail fixed interest, and bond vigilante blogger, said the government’s failure to get its spending down, coupled with a failure to generate growth in the economy, made it increasingly likely the rating would be cut.

But he also questioned whether it even mattered if the UK did lose the top rating.

“Our sovereign credit default swaps are lower than AAA Germany’s (70 basis points vs 103 bps), our bond yields are as low as they’ve ever been, and while the eurozone crisis continues the UK remains a safe haven for capital,” he said.

In February ratings agency Moody’s put the UK’s AAA credit rating on a negative outlook, which means there is a 30 per cent chance of the UK being downgraded within 18 months.

At the time Moody’s said that “any further abrupt economic or fiscal deterioration would put into question the government’s ability to place the debt burden on a downward trajectory for fiscal year 2015-16″.

A month later another ratings agency, Fitch, also moved the UK’s AAA rating to negative, meaning there is a 50 per cent change of a downgrade in the next two years.

Since those revisions, the final quarter of 2011 saw the UK’s gross domestic product (GDP) growth estimate fall from -0.2 per cent to -0.4 per cent, while the third estimate of economic growth in the first quarter confirmed the economy shrunk by 0.3 per cent, down from the first estimate of -0.2 per cent.

The impact of the extra bank holiday on economic activity now has forecasters expecting a third consecutive negative quarter.

Meanwhile, in May the UK borrowed £18bn, well above the expectation of £14.5 billion and £3bn more than was borrowed in May 2011.

“Whilst as a good Keynesian I’m all in favour of fiscal stimulus helping to support the existing monetary stimulus in the UK, this is not the implicit deal that Chancellor George Osborne made with the rating agencies – that being that he would deliver both growth and austerity together and thus get the UK’s debt/GBP ratios down in coming years,” said Mr Leaviss.

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