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

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Engineering Project Manager

£35000 per annum: Recruitment Genius: This company is going through a period o...

Recruitment Genius: Senior Software Developer - Java

Negotiable: Recruitment Genius: This award-winning digital publishing solution...

Austen Lloyd: Construction Solicitor - City

Excellent Salary: Austen Lloyd: NON-CONTENTIOUS (0-2 PQE) - A rare opportunity...

Recruitment Genius: Senior Financial Analyst

Negotiable: Recruitment Genius: A Senior Financial Analyst is required to join...

Day In a Page

Read Next
Numbers of rapes reported to police have soared by almost one-third over the last year  

At last, the DPP are confronting some toxic rape myths with their new guidelines

Sian Norris
 

Fighting Ebola: When I'm home, I'll be able to touch people again - it's something you miss here

Catherine Mahony
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee
World War Z author Max Brooks honours WW1's Harlem Hellfighters in new graphic novel

Max Brooks honours Harlem Hellfighters

The author talks about race, legacy and his Will Smith film option to Tim Walker
Why the league system no longer measures up

League system no longer measures up

Jon Coles, former head of standards at the Department of Education, used to be in charge of school performance rankings. He explains how he would reform the system
Valentine's Day cards: 5 best online card shops

Don't leave it to the petrol station: The best online card shops for Valentine's Day

Can't find a card you like on the high street? Try one of these sites for individual, personalised options, whatever your taste
Diego Costa: Devil in blue who upsets defences is a reminder of what Liverpool have lost

Devil in blue Costa is a reminder of what Liverpool have lost

The Reds are desperately missing Luis Suarez, says Ian Herbert
Ashley Giles: 'I'll watch England – but not as a fan'

Ashley Giles: 'I'll watch England – but not as a fan'

Former one-day coach says he will ‘observe’ their World Cup games – but ‘won’t be jumping up and down’
Greece elections: In times like these, the EU has far more dangerous adversaries than Syriza

Greece elections

In times like these, the EU has far more dangerous adversaries than Syriza, says Patrick Cockburn
Holocaust Memorial Day: Nazi victims remembered as spectre of prejudice reappears

Holocaust Memorial Day

Nazi victims remembered as spectre of prejudice reappears over Europe
Fortitude and the Arctic attraction: Our fascination with the last great wilderness

Magnetic north

The Arctic has always exerted a pull, from Greek myth to new thriller Fortitude. Gerard Gilbert considers what's behind our fascination with the last great wilderness