U.K.’s Credit Rating Cut Because of All the Money It’s Spending to Fight the Virus
A pedestrian wearing a protective face mask walks past residential properties in London, U.K. (Photographer: Hollie Adams/Bloomberg)

U.K.’s Credit Rating Cut Because of All the Money It’s Spending to Fight the Virus

(Bloomberg) -- Britain had its credit ranking downgraded by Fitch Ratings, which cited the weakening of public finances caused by the impact of the Covid-19 outbreak.

The ratings company also pointed to the uncertainty regarding the post-Brexit trade relationship with the European Union in cutting the U.K. rating to AA- from AA. The outlook is negative.

“The downgrade reflects a significant weakening of the U.K.’s public finances caused by the impact of the Covid-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent,” Fitch said. “The downgrade also reflects the deep near-term damage to the U.K. economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit U.K.-EU trade relationship.”

The economic devastation being wrought by the coronavirus pandemic has blown apart the relatively benign fiscal projections made just a few weeks ago. Fitch now estimates the U.K. economy could contract by close to 4% this year, followed by growth of around 3% in 2021, though there is “material downside risk” to the forecast.

Britain was on course for a budget deficit of 55 billion pounds ($68 billion) in the fiscal year starting April 1. Now, according to Bloomberg Economics, borrowing could reach 160 billion pounds, or more than 7% of gross domestic product, and drive up already elevated levels of government debt.

The dramatic shift reflects the cost of direct government support to the prop up the economy, plus the loss of tax revenue and increased social spending that accompanies a rapidly shrinking economy.

The downgrade comes little more than three months after Fitch improved its assessment of the British economy after Boris Johnson’s emphatic election victory removed the immediate uncertainty over Brexit.

©2020 Bloomberg L.P.

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