By Tasmia Akkas

February 17, 2012

AAA rating is a badge of honour, suggesting if a country maintains its AAA status, the economy has hope and something will pick up. However a new EU report has named and shamed Britain and predicts that Britain’s economy is ‘at risk.’ The growth prospects of Britain look low due to the decline in British exports and high private debt caused by property prices.  This means there is now a 30 percent chance of Britain losing its triple-A credit rating in the next 18 months. Britain may have once been commended for having a growing industry, but the reality is that it is slowly vanishing; coal and steel are industries declining, manufacturing is being transferred to shiny lights in Japan and China. The threat of a lower rating is another blow to the economy and it seems there is little hope for the economy to pick up any time soon.
Unfortunately Britain has been deemed to hold the worst decline of sharing exports, down 24.3pc over the last give years at a time of soaring public debt.  “The UK has lost export market shares over the last decade, although some stabilisation can be noted in recent years,” said a draft of the report. “At the same time, the UK recorded current account deficits.” Although it may just appear like a shiny badge of honour, the rating is extremely important. A lower credit rating could make it more expensive for the government to borrow money. The downgrade could in turn potentially lead to loss of investor confidence in Britain’s economy, something the economy cannot afford. However the warning is somewhat of a reality check for the British government to realise that its approach is not sufficient. Britain has to deal with its debt and find solutions.

“Unless you have growth, if your plan is unbalanced it becomes self-defeating and today is the first evidence that even the ratings agencies are waking up to the fact George Osborne’s plan is not working,” Ed Balls told the BBC.

This is another wakeup call for the British economy highlighting that we need growth because without jobs the deficit simply cannot be addressed. In reality we need credible fiscal policy and growth.Just as any bank looks at previous debts and finances when lending out money, personal credit scores seal the deal if one is to achieve a loan. If Britain does find itself lowered sovereign credit ratings indicate the risk of lending money. However, the agency did note the UK “continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area.”

 

The AAA rating could make no difference, or it could mean that Britain has suffered another blow. However, we will have to wait and see the true outcome and if it has any serious effects. Perhaps the government and the markets should ignore the rating agencies and focus on paying the debts back. The UK arguably has a credible and sustainable fiscal policy and this will ensure that debts will be paid back. However things can be done better: the fiscal policy is too tight and we now see unemployment at its highest since 16 years causing social and economic damage. Perhaps if the policy was loosened prospects for employment could be improved.

Also put on the EU watch-list, according to the draft report, are Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, Hungary, Slovenia, Finland, Sweden. The 12 countries will be investigated under new EU “enhanced surveillance” powers for Brussels. Under the new regime, aimed at setting up an early warning system to head off repeats of the Eurozone debt crisis, Britain can be investigated but cannot be sanctioned if it is found to have persistent imbalances.

(Photo credit: Flickr/ 401_k)