Fitch Says Cameron Faces ‘Formidable’ U.K. Debt Task (Update1)
By Gonzalo Vina and Lukanyo Mnyanda
June 8 (Bloomberg) -- British Prime Minister David Cameron needs to accelerate budget-deficit cuts to protect the nation’s top credit rating, Fitch Ratings said. The pound fell and U.K. stocks declined.
The U.K. is lagging behind other European countries in publishing deficit-reduction plans as investor concerns over government debt loads increase, Fitch said today in a statement, the first by a credit-rating firm on the U.K. since Cameron took office on May 11.
“The scale of the United Kingdom’s fiscal challenge is formidable and warrants a strong medium-term consolidation strategy -- including a faster pace of deficit reduction than set out in the April 2010 budget,” Fitch said.
Cameron, preparing voters for the deepest spending cuts in a generation, yesterday said the previous Labour government left the public finances in a worse state than he anticipated and warned that the squeeze to come will “affect every single person in our country,” possibly for decades. Fitch today said the increase in debt in the U.K. had been faster than in any other AAA-rated country.
In statement responding to Fitch, the Treasury said the government is committed to a significant acceleration in the pace of budget cuts. Chancellor of the Exchequer George Osborne is due later today to explain the principles that will underlie the reductions.
Gartman Warning
The U.K.’s Conservative-Liberal Democrat coalition is seeking public backing for cuts that will be the deepest since Margaret Thatcher was prime minister in the 1980s and last longer than any other since World War II. The pound has fallen 11 percent against the dollar this year amid concern the government will struggle to fix the public finances.
A credit rating downgrade for the U.K. is “coming,” Dennis Gartman, an economist and editor of the Suffolk, Virginia-based Gartman Letter, said in an interview today on Bloomberg Radio.
Cameron yesterday laid the ground for the June 22 emergency budget in which Osborne will set out the overall reductions needed to tackle a deficit that ballooned to 11.1 percent of gross domestic product in the fiscal year through March.
Debt Costs
Without action, the cost of servicing government debt will more than double to 70 billion pounds ($101 billion) by 2015, more than the combined budgets for transport, running schools in England and combating climate change, Cameron said in a speech near London.
Net debt in Britain climbed to 62.1 percent of gross domestic product in April, compared with 43 percent at the start of 2008 before the economy entered its worst recession since World War II.
The International Monetary Fund said in May it expects U.K. debt to climb to 71.6 percent of GDP this year, versus 66.2 percent in the U.S., 68.6 percent in Germany and 74.5 percent in France.
The pound slid 0.4 percent to $1.4418 as of 12:57 p.m. in London. The benchmark 10-year government bond yield was 2 basis points lower at 3.47 percent. The FTSE 100 stock index fell 1 percent to 5020.03.
Fitch said Gordon Brown’s Labour government had set out “unambitious” deficit-reduction plans to cut the 156 billion- pound deficit in half in four years and used “arguably optimistic growth assumptions.”
Growth Forecasts
In May, the average of independent forecasts compiled by the Treasury was for growth of 2.2 percent next year compared with the Treasury’s March forecast of 3.25 percent.
Should the newly created independent Office for Budget Responsibility cut its forecasts for growth, the new government may have to tighten fiscal policy more aggressively to compensate.
“While a similar deficit reduction path to that set out in the April 2010 budget but based on more realistic growth assumptions might be viewed as more credible, it would still run the risk of leaving the U.K. as something of a standout relative to the deficit targets of other advanced country sovereigns, the U.S. notwithstanding,” Fitch said.
Fitch said the new government had “acted very quickly” during its first weeks in office by pledging to cut spending by 6 billion pounds this year.
Standard & Poor’s, which affirmed its “negative” outlook on the U.K.’s AAA grade on March 29, urged the government to maintain its commitment to repairing the public finances.
“Much, much more needs to be done, considering that the deficit is actually in excess of 150 billion,” Moritz Kraemer, head of the sovereign ratings group for Europe, Middle East and Africa at the ratings company, said in a Bloomberg Television interview today. “There’s a lot of structural deficit as well, so there’s a lot of work ahead.”
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