UK more at risk than ever of losing AAA rating, top investor Neil Woodford warns
A nightmare week for Gordon Brown ended last night with a new blow, as one of the City’s leading fund managers warned the prospect of Britain losing its top tier credit rating is “more likely now than it has ever been”.
By Edmund Conway and Angela Monaghan
Published: 8:34PM GMT 08 Jan 2010
Neil Woodford, head of investment at Invesco Perpetual said that there was a “high probability” of Britain losing its AAA credit rating, something which has never happened since a rating was first put on UK debt more than three decades ago. The downgrade would be likely to send the pound plunging, and could send Britain towards a debt spiral, as the Treasury is forced to pay greater interest rates on its debt, which in turn pushes the deficit still higher.
In a call with analysts from around the City, Mr Woodford compared Britain today with the mid-1970s, when it was bailed out by the International Monetary Fund, but pointed out that “the rating agencies did not really exist at that time.”
“I would argue that there is a high probability... a decent chance that we will be downgraded, and it is a near certainty if we do not, in the wake of the next election, properly deal with the deficit. There are some major challenges here. If we do not take the medicine, there will inevitably be a downgrade. If we do, we have a chance of escaping a downgrade.”
The comments come only days after PIMCO, the world’s biggest bond house, declared that it is selling some of its cache of UK government debt, otherwise known as gilts, and judged that there is a 80pc chance that Britain has its top-notch rating downgraded. Standard & Poors, and the other major credit ratings agencies, have warned that unless the next Government adopts more ambitious plans to cut the deficit, it will remove Britain’s AAA status. However, in the pre-Budget report last month, Alistair Darling unveiled plans that were slightly less ambitious than those in the Budget.
Mr Woodford said: “I do not believe we have the ingredients for a sustainable economic recovery. The bank-crisis resolution period is likely to be very long and drawn-out.”
A rating downgrade, he added, “would be pretty tough for the economy, because, of course, it would mean that we would end up paying more for our borrowing, which would make the deficit more expensive... some pressure would be brought to bear on the currency, which could take a bit of a knock. It has already fallen quite a long way but it could fall further.”
On a more positive note the latest snapshot of the global economy from the Organisation for Economic Co-operation and Development (OECD) suggested Britain’s prospects had strengthened since last month.
The UK measure on OECD’s “leading indicators” - which attempt to signal the short-term economic outlook - rose by 1.2 points to 105.7 signalling “expansion” for the second month in a row.
Other data published yesterday showed that the prices charged by Britain’s producers for their goods rose 0.5pc in December, more sharply than the 0.2pc rise predicted by economists. Food prices were a significant driver and pushed annual factory gate rose 3.5pc from 2.9pc in November. The prices paid by manufacturers for their goods rose by 0.1pc.