Meaning of UK Credit Rating

The UK credit rating is a measure of the UK government’s credit worthiness on the level of government borrowing.

  • AAA rating implies that the government is liable to honour its debts and repay bonds and gilts in full.
  • A- would indicate a small chance of default.
  • BBB rating implies the investment is speculative with a reasonable chance of default.
  • If the UK had its debt rating downgraded to say CCC. It would imply there is a strong chance of debt default.
  • ‘Junk status’ D – implies the country is actively defaulting on its loan.

The UK Debt Rating is important for determining:

  • How much we can borrow from markets
  • At what cost we can borrow.

At the moment, the UK holds a AAA credit rating. This means we can borrow relatively cheaply. Interest rates on UK bonds are
Currently just over 4% for a 30-year bond and 0.5% for less than 1 year to maturity.

The yield on the UK 10-year bond is currently 3.55%. It has fallen 0.5 percentage point this year. By comparison, the 10-year Greek bond yield was trading at 7.8%. (May 24th 1010) The decrease in the bond yield shows markets are still optimistic about the UK situation.

As of March 2010, the UK still retains an AAA credit rating according to Moody Investment services.
In May 2010, S&P warned that there is a chance of the UK losing its AAA rating. It points to Debt to GDP rising to over 60% and a lack of a clear plan to reduce debt in the long term. However, this looks unlikely now  because:

However, we still have a very high level of annual borrowing and national debt which has now exceeded 60% of GDP. The UK could yet be vulnerable if:

  • Factors pushed the UK back into recession (e.g. spending cuts, Euro recession e.t.c)
  • Global Crisis in government bonds made investors even more nervous.

The debt rating is particularly important for foreign holders of UK debt. A decline in debt rating would encourage investors to hold bonds in other countries.

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