Fitch Puts British Debt on Review for Downgrade

LONDON — Britain’s economic troubles took a turn for the worse on Friday as Fitch Ratings came a step closer to becoming the second agency to strip the country of its triple-A investment grade.

Fitch put the debt on watch for a possible downgrade just days after the release of gloomy government economic data. The figures showed that British debt would “peak later and at a higher level than previously expected by Fitch,” the agency said on its Web site.

The change came a month after Moody’s Investors Service lowered its investment rating for British debt, knocking it to Aa1 from Aaa, saying that one of the principal factors was the very slow pace of the British recovery.

Fitch said Friday that “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.”

Credit downgrades together with a weaker economic outlook could prompt some holders of British bonds to sell their holdings. Government bonds have benefited from the economic turmoil in the euro zone, which had made them more attractive to foreign investors.

The Fitch announcement followed a gloomy speech by George Osborne, the chancellor of the Exchequer, in Parliament on Wednesday. He said that economic conditions remained difficult and that it would take longer than expected to meet his debt-reduction target.

Citing figures from the Office for Budget Responsibility, an independent economic forecasting group, he said the British economy would grow 0.6 percent this year, half of the 1.2 percent forecast earlier. Growth next year is expected to be 1.8 percent, down from a previous estimate of 2 percent, according to the office.

Public-sector net debt as a percentage of gross domestic product would start falling only in the fiscal year ending in 2018. That is a year later than Mr. Osborne forecast in December, when he pushed the goal back to 2017 from 2016.

To help generate growth, Mr. Osborne pledged to divert some of the proceeds of a far-reaching cost-cutting program to lend to home buyers, helping them with deposits for newly built houses. He is also relying on the Bank of England to keep interest rates low for longer even as inflation continues to hover above the central bank’s 2 percent target.

Mr. Osborne is relying on the Bank of England and the housing market to help create the economic upturn he needs to meet his debt targets.

He played down the importance of the Moody’s downgrade, saying it was just another sign of how important its deficit-cutting strategy was. Moody’s decision was “disappointing news,” he said, but it also showed that “Britain cannot let up dealing with its problems” and that “if we abandon our commitment to deal with that debt problem, then our situation will get very much worse.”

Landon Thomas Jr. contributed reporting.

Article source: http://www.nytimes.com/2013/03/23/business/global/fitch-puts-british-debt-on-review-for-downgrade.html?partner=rss&emc=rss