Recently, a report suggested austerity can increase debt levels. Now, there is an indication that austerity could cause a decline in credit ratings. This has certainly been the experience of many European countries – who since they introduced austerity measures – have seen a reduction in their credit rating.
Austerity hawks have often sold immediate spending cuts on the grounds that if we don’t tackle the deficit, we will lose our precious AAA credit rating. But, austerity measures which worsen the recession, could make the credit downgrade even more likely. Markets seem to be very concerned with prospects for real GDP growth, and for good reason. Lower growth increases the cyclical deficit and creates a deflationary debt spiral – where efforts to keep cutting spending prove self-defeating.
If there is triple dip recession in 2013, it will be a likely signal for Moody’s to cut Britain’s credit rating from its current AAA. However, some economists suggest that credit ratings have little actual impact on markets. A cut in credit ratings only confirms what markets knew already. So far the prospects of a decline in credit ratings haven’t influence UK bond yields.
Moodys, a rating agency, said it had not yet decided whether to cut Britain’s credit rating but said it could act in the new year either if growth prospects worsened or if Osborne failed to stick to a demanding timetable for reducing national debt. Moodys are aware of the seeming contradiction and difficult balancing act between reducing the deficit and economic stimulus.
The government had hoped that it’s budgetary plans would start to reduce Britains debt to GDP ratio by 2015-16 – however, the lower than expected growth means these targets may be missed.
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