MercoPress. South Atlantic News Agency

UK risks loosing AAA sovereign credit rating because of budget deficit

PM Brown said he has a credible plan to halve deficit over the next few years

The United Kingdom is the developed nation most at risk of losing its AAA sovereign credit rating because of the budget deficit and virtually no margin left in the event of another downturn, Fitch warned Tuesday.

Speaking at the credit rating agency’s annual conference in Tokyo, Fitch managing director David Riley said a number of developed countries remained at risk of a downgrade, but that the UK was “probably” most at risk due to its spiralling budget deficit, expected to reach £175 billion in the current financial year.

The key to maintaining a coveted AAA rating would be the ability to reverse this stimulus and substantially reduce the budget deficit over the coming years, Riley said. Fitch had made a similar warning in September in a more detailed report.

Riley’s comments immediately knocked sterling, which had hit a three-month high against the dollar yesterday. The pound fell by two cents against the dollar, though it has since recovered much of this.

The government immediately moved to reassure markets, with Prime Minister Gordon Brown telling journalists Tuesday morning that the UK had a credible plan to halve the budget deficit over the next few years.

Speaking at his monthly press conference, Brown insisted the UK would “probably” be ahead of other countries when it came to closing the budget deficit.

But Fitch also warned that developed countries including the UK had little room for manoeuvre in the event of a further downturn.

“Many credit profiles of major 'AAA' sovereigns have been significantly weakened by the financial crisis and the subsequent recession” Riley said

Thus, the already out-sized budget deficits and the rise in government debt had reduced the “fiscal space” for policymakers to respond to further adverse shocks.