It's not the end of the world – but it's the end of any false complacency

 

Share
Related Topics

This is bad news. A drop in a credit rating by one agency does not matter that much in itself, for heaven knows, the rating agencies have been absurdly wrong in their judgements. The AAA ratings they gave to dodgy US housing debt were one of the factors in the banking crash of 2008. Both the US and France have seen a similar modest downgrading of their debt. But it matters because it focuses investors on the inherent weakness not just of British national finances at the moment but also of the longer-term commitment of the UK authorities to holding down inflation and assuring investors that they will get paid back in real – rather than devalued – money.

For the downgrade comes at a bad time for the pound. It has been weak for some time, but the recent words from Mervyn King that it was overvalued, coupled with his voting for a further injection of quantitative easing, have been read by the markets that British policy will be to try to push down the pound, even if to do so increases inflation. When you have the governor of the central bank trashing the currency, investors have a right to feel nervous. Suggestions that the new governor, Mark Carney, will also push for a further relaxation of monetary policy have compounded these fears.

In the short term the damage of the downgrade is limited. We will see what the financial markets do this week but the experience of the US and France following their downgrades has been that the change has had little immediate impact. By world standards the UK is still an extremely credit-worthy nation. What matters is the longer term. The world is probably facing a gradual increase in long-term interest rates. Governments will have to pay more for their money. Or put another way, the burden on taxpayers of servicing the debts accumulated during the past recession will climb. That will put yet more downward pressure on public spending, for money spent on interest payments is not available to spend on services.

Higher long-term interest rates increase the cost of borrowing not only for the Government; they also increase it for corporations and for home-buyers. So while they will be welcome for savers, they will become a drag on economic growth.

This is a problem facing virtually all governments, not just the UK's. But we have perhaps become lulled into complacency by the fact that in recent months the UK has been seen as something of a safe haven, with its own currency, an AAA rating on its debt, and a government seemingly committed to cutting its deficit. Any such complacency will be shattered now. There was always likely to be a downgrade, and the reasons for it go back to the fiscal catastrophe that the coalition inherited. But the actual event could become a catalyst for wider concerns about the performance of the British economy and the commitment of the authorities to slog on correcting both their own errors and the mistakes of the past.

React Now

iJobs Job Widget
iJobs General

Online Advertising Account Executive , St Pauls , London

£26K-30k + Bonus, Private Medical Insurance, Company Pension: Charter Selectio...

Advertising Account Executive - Online, Central London

£25K-28k + Bonus, Private Medical Insurance, Company Pension: Charter Selectio...

Senior Infrastructure Consultant

£50000 - £65000 Per Annum potentially flexible for the right candidate: Clearw...

Public Sector Audit - Bristol

£38000 per annum + Benefits: Pro-Recruitment Group: Do you have experience of ...

Day In a Page

Read Next
 

It’s two decades since ‘education, education, education’, but still Britain’s primary school admissions are a farce

Jane Merrick
United Nations special rapporteur Rashida Manjoo addresses journalists in central London  

We could have had a proper debate about sexism after Rashida Manjoo's comments. Instead, we’re fencing over a media-garbled paraphrase

Archie Bland
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit
Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics

Is sexual harassment a fact of gay life?

Westminster is awash with tales of young men being sexually harassed - but it's far from being just a problem in politics
Kim Jong-un's haircut: The Independent heads to Ealing to try out the dictator's do

Our journalist tries out Kim Jong-un's haircut

The North Korean embassy in London complained when M&M Hair Academy used Kim Jong-un's image in the window. Curious, Guy Pewsey heads to the hair salon and surrenders to the clippers
A History of the First World War in 100 moments: A forgotten naval victory in which even Nature played a part

A History of the First World War in 100 moments

A forgotten naval victory in which even Nature played a part
Vespa rides on with launch of Primavera: Iconic Italian scooter still revving up millions of sales

Vespa rides on with launch of the Primavera

The Vespa has been a style icon since the 1950s and the release this month of its latest model confirms it has lost little of its lustre
Record Store Day: Independent music shops can offer a tempting alternative to downloads

Record Store Day celebrates independent music shops

This Saturday sees a host of events around the country to champion the sellers of well-grooved wax
10 best smartphones

10 best smartphones

With a number of new smartphones on the market, we round up the best around, including some more established models
Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

Mickey Arthur: Aussie tells ECB to stick with Ashley Giles

The former Australia coach on why England must keep to Plan A, about his shock at their collapse Down Under, why he sent players home from India and the agonies of losing his job
Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal
Supersize art

Is big better? Britain's latest super-sized art

The Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
James Dean: Back on the big screen

James Dean: Back on the big screen

As 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star perfected his moody act