UK credit rating unaffected by hung parliament

Rating agencies Standard & Poor’s and Moody’s have both said that the UK’s AAA credit rating will not be downgraded in the likely event of a hung parliament.

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Ahead of polling day some commentators had expressed fears that a hung parliament would have a negative impact on the UK’s rating as no clear majority would mean a lack of clarity on how to tackle the budget deficit.

The prospect of a hung parliament was also thought to pose the threat of a weak government unable to make policy decisions decisively.

But S&P Ratings Services has announced today that its outlook on the UK’s creditworthiness remains unchanged.

The company says it will review its current rating of the UK – AAA with a negative outlook – once it has received the government’s fiscal plans over the medium-term.

A statement from S&P says: “The complexion of the new government is not, in itself, a rating factor for us.

“Instead, our focus is on whether the government’s fiscal consolidation plan to be unveiled in due course is likely or not, in our view, to put the UK government debt burden on a secure downward trajectory over the medium term.”

S&P estimates the UK government debt to rise to 77% of GDP in 2010 and to approach 100% by 2014, compared with 44% in 2007.

Moody’s is more optimistic than S&P, maintaining a stable outlook on the country’s Aaa credit rating.

Arnaud Mares, senior vice president at Moody’s, says: “The UK general election on May 6 has resulted in the unusual situation of no single political party having an outright majority in the house.

“This creates political uncertainty in the short-term and perhaps also in the long-term.”

Mares says that the UK’s Aaa status will be maintained as long as the prime minister who ultimately forms the government gains the backing in parliament of a detailed plan to tackle the deficit.

He adds: “The basis for our view is that it is not the political but the policy outlook that matters most.

“In essence, we do not believe that the absence of a one-party majority necessarily makes the government less likely or less able to stabilise public debt metrics in the coming years, nor that it would be unable to do so at levels that are consistent with the maintenance of its current Aaa rating.

“Nevertheless, this is not to say that the UK government’s Aaa rating is secure forever. “

But despite the somewhat positive announcements from the ratings agencies, the pound has tumbled against both the dollar and the euro.

Earlier today, sterling was down three cents against the dollar at $1.4633, and fell 2.6 cents against the euro at €1.1478.