CHANCELLOR Alistair Darling might have hoped that the Greek sovereign debt crisis would draw attention away from the parlous state of Britain’s own public finances. He will have been sorely disappointed – the Eurozone’s troubles have only highlighted the problems facing other highly indebted countries such as the UK and the US.

The ratings agencies have been firing warning shots at the UK since last May when Standard & Poor’s downgraded the outlook on the UK’s coveted triple-A debt rating to negative from stable – the first time since S&P initially rated the UK in 1975 that it has been anything other than stable. And on Tuesday, Fitch Ratings cautioned that the size of the UK’s debt is making it vulnerable.

While Bank of England governor Mervyn King said yesterday that he couldn’t see any reason why Britain would lose its top rating, if the next government does not make concrete and credible plans to reduced the deficit, then there would be ramifications in the markets.

Commerzbank’s Peter Dixon says: “There is clearly a risk that if fiscal consolidation is postponed after the election, this will have a big impact on the gilt market.” Yields would surge as investors demand greater compensation for owning riskier government debt and the Treasury might find it more difficult to issue the £225bn of bonds it needs to sell in 2010-11. As of last week, the Bank of England, the biggest buyer, has exited the market – at least for now.

A lower rating would make it more expensive for the government, already struggling under the weight of the deficit, to service its debt. This would worry the markets and would have a detrimental effect on both the value of sterling and the markets, as investors avoid sterling-denominated assets in favour of countries still rated triple-A.