Why Britain won’t lose its AAA rating
There’s one good reason why the UK’s sovereign debt will not lose its AAA rating. It has nothing to do with Britain’s financial strength and everything to do with the credit rating agencies wanting to avoid regulation.
That means not upsetting the government.
Regulation of banks has been tightened considerably since the financial crisis. There is even to be a code for investors. But rating agencies remain outside the regulatory system, despite being blamed for failing to forecast the crash. Some see a fundamental conflict of interest in the agencies being paid by the issuers of the bonds that they rate.
There is thus pressure, not least from European Union legislators, to impose controls on the agencies – just as there was after the collapse of Enron and WorldCom, when the ratings firms again failed to predict collapse. Regulation of the agencies is on the agenda of Britain’s Financial Services Authority too.
So what incentive is there for the credit agencies to provoke trouble by cutting the UK government’s debt rating? Iceland can be reduced to junk status and Greece downgraded, but removing the Britain’s AAA rating would be asking for retaliation.
The agencies are thus prepared to mutter threats but are in no mood for executing them. They are happy to use the general election as an excuse for delaying a downgrade, not least to see who is running the country afterwards and how tough they propose to be on regulating the agencies.
But there is no incentive for the UK government to push ahead with regulation, either, if it means upsetting the agencies and provoking them to downgrade the government’s mountain of debt, thus increasing the servicing cost even further.
Expect a Mexican stand-off therefore. The UK government will not press ahead with regulating the agencies if the agencies do not downgrade the government’s debt. So everyone is a winner – or possibly, everyone is a lower.
