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David Herdson asks: “What are the politics of a Credit Downgrade?”

December 8th, 2012

How much does the UK’s Triple-A credit rating matter?

The announcement earlier this week from Fitch – one of the three big credit ratings agencies – that the UK’s triple-A credit rating was only just consistent with the government debt levels projected in the Autumn Statement raises again the prospect that at some point soon, one or other of the will cut it.

In one sense – the practical matter of borrowing money – such a move probably would make little difference. Credit ratings matter when investors don’t have that much knowledge of the institutions wanting to borrow; big governments don’t fall into that category and if credit risk has (marginally) worsened, investors will have already priced that into the relative interest rates. To that extent, the credit ratings follow the market as much as lead it and just confirm what has already happened and is already known.

In another sense – the political one – it matters hugely. The government has made a great deal about the importance of retaining the confidence of the money markets. To be downgraded would greatly undermine attempts to claim success in that endeavour. Labour would no doubt argue that in addition to the government having failed in its objective, the Coalition’s arguments against Labour’s policy of borrow-to-stimulate are weakened if the rating was lost anyway.

It probably ought to matter even more. The economic argument is still being fought on nominal growth – the change in GDP figures – and very much Labour’s territory. Any idiot can increase GDP figures by throwing borrowed money into the economy but it’s not remotely sustainable. Protecting stability and building a sustainable recovery is a very different matter but despite it being at the heart of the government’s economic strategy, it’s not been successful in establishing the media terms of debate on those lines.

Some would no doubt argue that the ratings agencies themselves have hardly covered themselves in glory in recent years. That’s true but it’s difficult to have it both ways – you can’t argue that their opinion only matters when they’re telling you what you want to hear.

Would a downgrade be an undiluted ‘win’ for Labour then? It ought to be an open goal to shoot at but there’d be two main risks to missing it. One is that with low confidence in the agencies, a downgrade could be trumped by an upturn in the economy: the US lost its universal triple-A rating but Barack Obama was re-elected (though he hadn’t made as much of the issue as the Coalition has in the first place). The other is that the electorate might ‘cling to nurse for fear of worse’, rather as they did in 1992.

Even so, continually missing its targets doesn’t look good to the electorate or to the markets; it’s a matter of credibility – and relative economic credibility is utterly critical to the battle for the next general election.

David Herdson