Financial services

UPDATE 3-Fitch cuts UK's rating on coronavirus debt surge

* Fitch cuts UK sovereign rating to AA-

* Single-notch downgrade reflects likely jump in debt

* Ratings agency says government stimulus necessary

* But debt likely to peak at above 100% of GDP

* Fitch leaves negative outlook on UK rating (Adds reaction from UK Treasury)

By William Schomberg and Aditi Sebastian

LONDON/BENGALURU, India, March 28 (Reuters) – Ratings agency Fitch cut Britain’s sovereign debt rating on Friday, saying the country’s debt levels would jump as the government ramped up its spending to offset the near shutdown of the economy in the face of coronavirus.

Fitch downgraded the country by one notch to ‘AA-‘ – the same level as its rating for Belgium and the Czech Republic – from ‘AA’ and said a further cut could follow as it kept the rating on negative outlook.

“The downgrade reflects a significant weakening of the UK’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 UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship.”

Facing what some economists say could be Britain’s deepest recession in a century after the government ordered many businesses to close to slow the spread of coronavirus, finance minister Rishi Sunak has announced a string of stimulus measures to try to prevent a surge in unemployment.

“We have taken unprecedented action to support people, businesses and our vital public services through this crisis. These are the right steps to protect our economy against lasting damage,” a spokesman for the Treasury said on Saturday in response to the Fitch rating cut.

“Our public finances are sound after 10 years of bringing debt and borrowing under control. These measures are temporary and will lead to a short-term increase in borrowing.”

Central to Sunak’s plan is a commitment for the state to pay 80% of the wages of workers who are temporarily laid off.

The Bank of England, like other central banks around the world, has also jumped into action, expanding its bond-buying programme by a record 200 billion pounds and cutting its main interest rate to a record low 0.1%.

Fitch said the measures were necessary to cushion the economy but it now expected Britain’s public debt, as a share of gross domestic product, would rise to 94% in 2020 and 98% in 2021, from 84.5% in 2019.

“Over the medium term, we expect public debt to peak at well above 100% of GDP beyond 2025 assuming a gradual reduction in fiscal deficits and trend GDP growth of 1.6%,” it said.

Fitch said the coronavirus shutdown was likely to mean Britain’s economy shrinks by nearly 4% in 2020, assuming that the drastic containment measures can be relaxed in the second half of the year, leading to a 3% bounce in growth in 2021.

“However, with so much depending on the extent and duration of the coronavirus outbreak, there is material downside risk to these economic forecasts,” it said.

Doubts about Britain’s future trading ties with the European Union posed a further risk, Fitch said.

Britain’s former top-notch AAA rating has been cut steadily over the past seven years as the country struggled to bring down debt levels that doubled after the global financial crisis and then voted to leave the European Union, weighing on its long-term growth prospects in the eyes of the ratings agencies. (Reporting by William Schomberg in London and Aditi Sebastian in Bengaluru Editing by Sriraj Kalluvila, Daniel Wallis and Frances Kerry)


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