From Triple ‘A’ to Triple Dip?

A few months ago I wrote a post, in which I talked about the real reason that the UK can borrow at such low rates. To summarise it, the main reason is that the markets expect the UK economy to remain weak for the foreseeable future and are therefore prepared to accept low long-term rates now. In that post I did also talk a bit about the UK’s AAA credit rating:

…Despite the government claims that austerity is the barrier against a downgrade, I fully expect the UK to be downgraded next year…

And sure enough, yesterday exactly that happened as Moody’s downgraded the UK from AAA to Aa1. There’s been a lot in the press about it today but what does this downgrade actually mean? Is it even important? The answer to that is both yes and no.

Let’s start with the ratings agencies themselves. Ratings agencies have consistently proven themselves to be among the least reliable sources of useful information. They played a major part in causing the financial crisis by  handing out AAA credit ratings to the dodgy packages of sub-prime mortgages that the banks were selling and then failed to spot the banks themselves were credit risks until it was too late. While it’s perfectly reasonable to want an opinion on whether or not the UK is a credit risk (it isn’t), no one with any sense is going to listen to these people. Their opinions are not important anymore.

So if that’s the case, the downgrade shouldn’t matter, right? Well not quite. For that reason it doesn’t matter but for another reason it really does.

For the past three years David Cameron and George Osborne have used the UK’s AAA credit rating to justify austerity. Maintaining this rating, we’ve been told time after time, is crucially important. Why couldn’t we postpone spending cuts until the economy had recovered? We’d lose our AAA credit rating! Why couldn’t the government follow what basic economics suggests and provide a fiscal stimulus to create an economic recovery? We’d lose our AAA credit rating!

And we were all told what would happen if we did lose that rating. No one would want to lend to the government any more. Interest rates would soar and we’d be the next Greece. Well if that does happen on Monday then perhaps there was something to what George has been saying but I don’t think it will. What I think will happen is this:

Nothing.

Our borrowing rates will not soar because, firstly no one cares what the ratings agencies think and secondly the reason that rates are low is that the outlook for the UK economy is weak. This news is hardly going to change that – borrowing rates will more likely go down than up. And when the UK economy doesn’t implode on Monday morning, people are going to wonder what the fuss of keeping the AAA credit rating was all about in the first place. They’ll emerge from their bomb-shelters and say, “Was this really what we have spent the last three years living in fear of?”

The government has kept the threat of losing the AAA credit rating hanging over the UK public like the sword of Damocles and this was no accident. By convincing us that disaster would strike if we were to lose it they have been able to push through the economic policy they wanted to use anyway. But shortly that game will be up and then it will be clear for all to see that chasing credit ratings at the expense of jobs and growth wasn’t just a strategy that dismally failed, it was a strategy that had no justification all along.

RedEaredRabbit

Advertisements

About RedEaredRabbit
My name is RedEaredRabbit, King of Kings. Look on my works ye Mighty and despair.

One Response to From Triple ‘A’ to Triple Dip?

  1. Pingback: Killing the Confidence Fairy | RedEaredRabbit

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: