By: Dr. Mike Campbell
Not long after former UK Prime Minister Harold Wilson devalued the Pound Sterling in 1967, a movement started in the UK known as the “I’m backing Britain” campaign. Some people worked extra time for no extra money (let’s not go there…) and others made a conscious effort to buy British made products in favour of imported goods. The crisis had seen Sterling come under pressure on foreign exchange markets and despite the Bank of England’s best efforts to sustain its value; the writing was on the wall. Sterling took a 14% devaluation against other major currencies, in a bow to the inevitable and to make UK exports more attractive abroad and tackle the £800 million national debt. Sounds familiar?
Britain currently enjoys AAA credit rating status despite its own problems with a deficit and public debt. The current UK debt is estimated at £1.05 trillion and the trade deficit for February was £3.4 billion. The coalition government has approved a raft of austerity measures which are designed to reduce the deficit and this was done proactively – a big difference to Greece, Ireland and Portugal.
Two of the three major credit rating agencies, Moody’s and Fitch have stated that the UK credit rating is secure currently, but they have put the UK on “negative outlook” which implies that the rating could be downgraded within the next two years. On Friday, Standard and Poor’s (S&P) bucked this trend by insisting that the UK outlook remains stable and hence, the UK’s AAA rating is secure. According to a statement released by S&P: "In our view, the UK has a wealthy, open, and diversified economy, supported by a well-established political system and macroeconomic policy framework, which can react quickly to economic challenges. We expect economic policy to focus on closing the fiscal gap, and we forecast the government's net debt burden to peak in 2013 [at about 87% of GDP]."
The opinions of the credit rating agencies are important since they influence the interest that states must pay on government bonds to attract investors: the better the rating, the lower the yield.