U.K. moves step closer to losing top rating

Britain came a step closer to losing its top credit grade at Fitch Ratings after Chancellor of the Exchequer George Osborne said debt will rise more than previously forecast.

The U.K. was placed on rating watch negative, “indicating a heightened probability of a downgrade in the near term,” Fitch said in a statement in London Friday. The company will complete its review of the country’s debt grade by the end of April, it said.

“The persistently weak performance of U.K. growth, in part due to European growth, has increased uncertainty around the U.K.’s potential output and longer-term trend rate of growth with significant implications for public finances,” the ratings company said.

The move comes two days after Mr. Osborne’s annual budget, when he reduced his growth forecast and said it will take longer than previously expected to lower Britain’s debt. Moody’s Investors Service took Britain’s rating down to Aa1 from Aaa on Feb. 22, citing the economic outlook and challenges to the fiscal program.

Gilts have risen since the Moody’s downgrade.

The independent Office for Budget Responsibility cut its 2013 growth projection to 0.6% from 1.2%, Mr. Osborne told Parliament in his March 20 budget speech.

Over the five fiscal years starting in April, the defi- cit will total £434-billion (US$660-billion), £55.7-billion higher than forecast in December.

The OBR also expects net debt to begin falling in 201718, a year later than previously planned. It’s the second time the debt target has slipped. Net debt will peak at 85.6% of gross domestic product in 2016-17. The OBR previously put the peak at 79.9% of GDP in 2015-16.

Mr. Osborne first pushed back his timeframe for cutting debt in December. Fitch said at the time that missing the target “weakens the credibility of the U.K.’s fiscal framework.”

Investors often disregard changes in ratings. Yields on

Weakens credibility

sovereign securities moved in the opposite direction from what ratings suggested in 53% of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomb- erg published in December.

Investors ignored 56% of Moody’s rating and outlook changes and 50% of those by Standard and Poor’s. That’s worse than the longer-term average of 47 %, based on more than 300 changes since 1974.

The U.K. economy shrank 0.3% in the fourth quarter of 2012, and Mr. Osborne said in his budget statement that renewed turmoil in the euro area, the U.K.’s biggest export market, may damage recovery prospects.

“I will be straight with the country: another bout of economic storms in the eurozone would hit Britain’s economic fortunes hard again,” he said.

S&P put the U.K.’s rating on a negative outlook in December and said on March 20 it was examining the details of the latest budget.