Britain's AAA credit rating in jeopardy, warns agency

Fitch calls for 'credible' plan to tackle deficit as trade gap hits 17-month high of £8bn

Sterling suffered a triple whammy yesterday as poor trade figures, warnings from two credit agencies about the UK's AAA rating and the possibility of more bank failures badly damaged confidence.

The Fitch ratings agency said it was "uncomfortable with the fiscal adjustment path set out by UK authorities", and called for a "more credible and stronger fiscal consolidation plans during 2010".

However, it said Britain remained "within tolerance" of its crucial credit rating. "The UK, Spain and France, in particular, must outline more credible fiscal consolidation programmes over the coming year, given the pace of fiscal deterioration and the budgetary challenges they face in stabilising public debt," Fitch added.

"Failure to do so will intensify pressure on their sovereign ratings". Britain's trade gap hit a 17-month high of £8bn in January – £1bn more than in December. Export volumes fell by 8 per cent over the month, while imports dropped back by a much lower 2.3 per cent. Analysts said part of the reason for the unusually large deficit might have been the poor weather preventing goods getting to the docks. The car scrappage scheme, which has inflated the deficit by billions in recent months, was another special factor.

The overnight release of softer data about the housing market and retail sales also undermined hopes that Britain might be able to grow its way out of its difficulties. The news briefly sent sterling to a fresh 10-month low against the dollar, pushing it firmly below the $1.50 level, though the gilts market held up relatively well.

For the Government and the Bank of England, the news about exports was especially disappointing: the 25 per cent deprecation in sterling since the start of 2007 has yielded a poor return so far.

The Bank's Deputy Governor for monetary policy, Charlie Bean, told MPs last month that the improvement in British exports was no greater than would have been expected, given the revival in world trade last year, and the fallback in imports was also no more than might have been expected, given the contraction in the British market.

Thus, there has been no net improvement in the UK's share of world trade – a further sign that the much anticipated rebalancing of the British economy is yet to make much progress.

The withdrawal by the Bank of England of its Special Liquidity Scheme by 2012 will leave the banking system "fragile", according to another agency, Moody's.

The agency said yesterday: "There may be some institutions that have not sufficiently improved their standalone strength to offset the phasing-out of extraordinary systemic support, and the senior debt and deposit ratings of these institutions could be downgraded."

The fear is that at a time when a new government will be tackling the fiscal deficit by cutting public spending and increasing taxes, the Bank of England will also be squeezing the financial system and constricting lending, so that a second credit crunch and a double-dip recession may be inevitable.