Fitch warns UK debt will erode investor confidence

Fitch Ratings has warned that that Britain risks damaging investor confidence and the erosion of its AAA rating unless the Government brings in strong thrift measures in this week’s budget. 

The UK has seen the most rapid rise in the ratio of public debt to GDP of any AAA-rated country and Fitch has voiced concerns that Government plans to halve the deficit by the middle of the decade are not simply not strong enough.
 
‘The likelihood of the UK losing its AAA rating depends very much on the political will of the government after the general election. Whichever political party is successful, we expect the subsequent government to present firm plans as to how it intends to tackle the fiscal deficit,’ said Paul Read of Invesco Perpetual.
  
According to Richard Woolnough of M& G there are many more countries with a higher debt/GDP ratio including France and the US with Germany not far behind. ‘Of course, it is an issue that needs addressing but we have some breathing space until the election. Following that, if the government takes decisive action then Britain will keep its AAA rating. If not then we could see one or more of the agencies downgrade,’ he said.
 
Action after the general election is needed according to Woolnough. ‘I don’t think it necessarily has to be immediate, severe fiscal tightening, particularly as the economic recovery doesn’t yet look entrenched, but there has to be a clear and credible plan in place to reduce the deficit. This could take place through higher taxes and spending cuts for example,’ explained Woolnough.
 
But investors do need to be aware of its effects. ‘As a result of the latest Fitch announcement, more than ever, investors need to have exposure to fixed interest funds which have flexibility. Consequently rather than focus upon funds which fall into the corporate bond sector, our recommendation is to look to the strategic bond sector.  This is a sector allowing fund managers greater flexibility with regard to what they hold,’ said Nigel Walker, head of research at tqinvest.
 
‘Investors who are heavily exposed to the corporate bond sector ought to look to diversify their fixed interest exposure by investigating the alternatives offered by the strategic bond sector,’ he added.
 
Woolnough believes that uncertainty will persist until after the election. ‘There could be some more pain to come before we get there. But I do think there could be a buying opportunity somewhere down the line, particularly as I don’t think inflation is a problem and I can’t see growth accelerating in any meaningful way for some time,’ he said.