Chancellor George Osborne's attempts to cling onto the nation's triple-A credit rating look doomed but the loss would be "symbolic, not catastrophic", the UK's biggest bank says.
Any short-term turbulence in debt markets after a rating downgrade might even present investors with a buying opportunity for UK bonds, according to economists and market analysts at HSBC.
Two of the big three ratings agencies – Moody's and Fitch – at present have the UK on a negative outlook, implying a one in three chance of a sovereign downgrade. They and fellow agency Standard & Poor's are due to review the UK's debt position next year.
HSBC's UK economist Simon Wells said: "The UK can issue its own currency – it is a 'true sovereign' – and so pure default risk is almost zero as it can create money to finance debt. Reflecting this, the gilt market should largely shrug off a one-notch downgrade. Indeed, any dips might present a buying opportunity."
The bank's report warns that the nation's AAA rating is under most threat from worsening long-term growth prospects. The Office for Budget Responsibility already predicts the UK's share of gross debt to GDP to peak at 92.7 per cent in 2014-15. If the watchdog predicts lower long-term growth because of the sluggish recovery, gross debt could top the 100 per cent mark, flagged up by Fitch as a potential trigger for a downgrade.
Bank of England officials are relatively sanguine about a downgrade. Former rate-setter Adam Posen told MPs this year he did not view sovereign ratings as the "be all and end all of our credibility".