Q. WHAT EXACTLY HAS STANDARD & POOR’S DONE?
A. It has downgraded its rating on Britain’s AAA rating, to “negative” from “stable”.
Q. WHAT IS MEANT BY AN OUTLOOK DEFINITION?
A. An S&P rating outlook assesses the potential direction in which a rating will move over the next six months to two years. “Negative” means it may be lowered and is generally considered to be the first step towards a downgrade.
Q. WHY HAS S&P DONE THIS?
A. It believes that government debt could reach 100 per cent of GDP by 2013 – a level it said was incompatible, if sustained, with a top rating.
Q. HAS THIS SITUATION EVER HAPPENED BEFORE?
A. Yes. S&P placed the UK on negative credit watch in the aftermath of the last recession in October 1993. The AAA rating was maintained, however, and the outlook raised to stable in August 1995.
Q. HOW LIKELY IS THE RATING TO ACTUALLY BE DOWNGRADED?
A. In the past, revised outlooks from the major credit rating agencies have led to downgrades in around 37 per cent of cases. Standard & Poor’s says that the UK has a one in three chance of an actual cut in its ratings. Even the threat of a downgrade can be damaging, however, due to the threat of the government having to pay higher interest bills if it has any chance of selling bonds to finance its bumper debt pile.
Q. WHAT HAPPENS IF THE UK LOSES ITS “TRIPLE A” RATING?
A. Lower credit ratings result in higher borrowing costs because the borrower is deemed to carry a higher risk of default. A downgrade for the UK would mean gilt investors would want to get paid more to compensate for the risk of holding government bonds.
Q. HOW IMPORTANT IS A CREDIT RATING?
A. A lot of investments, such as corporate and government bonds, must carry a credit rating. This has resulted in credit rating agencies becoming very influential. However, their role in the sub-prime crisis, when they rated various mortgage-backed financial instruments that have since been branded “toxic”, has damaged their reputation.
Q. WHAT IS THE ROLE OF CREDIT RATING AGENCIES?
A. Credit rating agencies assess the risk of investing in corporations and governments. The largest are Moody’s, Standard and Poor’s and Fitch Ratings. They also provide a wide array of financial data and information on bonds, equities and mutual funds.
Q.WILL RIVAL AGENCIES FOLLOW SUIT AND CUT THEIR RATINGS?
A.It doesn’t look likely. Rival agencies Fitch and Moody’s yesterday quickly reaffirmed Britain’s “triple-A” status and said the outlook for the nation was stable.
Q.WHY HAS S&P CHOSEN NOW TO COME OUT WITH ITS RE-RATING?
A.Ratings agencies have been reviewing the UK’s status in light of the chancellor’s revelation in the Budget that national debt will reach £1.4 trillion over the next five years.