Coffee House

AAA loss is politically difficult for Osborne

22 February 2013

The United Kingdom’s triple A rating is now lost with one credit rating agency, Moody’s. This is a politically difficult moment for George Osborne. Back in February 2010, he set keeping the triple A rating as one of the key tests of a Conservative government’s economic policy. His opponents will delight in pointing out that he has failed the test he has set himself, while nervousness on the Tory benches about the coalition’s economic strategy will be heightened by this news.

Economically, though, I doubt that this will have much impact. In recent weeks, Britain’s debt has been trading more like that of France, which has lost its triple A rating, than Germany, which still has it. It is also worth noting that losing its triple A rating has had little impact on the US.

Politically, Osborne will argue that Labour’s economic policy would only lead to further credit downgrades. Labour will counter that Moody’s is downgrading the UK because of the lack of growth which it will claim is a consequence of coalition policy. There’s no doubt, though, that this news increases the pressure on the Chancellor before the Budget in March.

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  • David B

    Afraid Osborne drew the sword and he is going to have to fall on it.

  • Cameron

    In terms of the single biggest biggest issue facing the UK, Scottish independence, the main unionist voices typify the hypocrisy of our political class.

    “The independence referendum will be determined by economics rather than voters’ sense of Scottishness or Britishness, a social research institute has predicted.” – Magnus Gardham, Herald Scotland, 11th January 2013

    “It’s not really about economics at all. “This is much more of an emotional issue than an economic issue,” he said. “The economic issues are not that big a deal. Anyone who casts their vote on economic grounds exaggerates the importance of economics.”” – Magnus Gardham, Herald Scotland, 23rd February 2013

    Indeed, the No Scotland campaign group, optomistically known as “Better Together”, are currently handing out “information” leaflets that clearly state the risk of losing protection of the UK’s AAA credit rating, as one the great threats presented by abandoning the union. Anyone embarrassed yet? Its not too late to cross over from the dark side. (leaflet pdf from Better Together)

    Just as well the BoE is negotiating the final agreement to set up a three-year yuan-sterling swap line with the People’s Bank of China, China and India buying gold
    like there is no tomorrow, India banning private gold purchases, the US Fed and the Bank of International Settlements discussing reclassify gold as a Tier 1 Asset, and with a de facto replacement for the dollar already in operation, in terms of the SDRs offered by the Bank of International Settlements.

    Do you think they might know something but are not sharing it with us?

  • tdonofon

    for those who missed it the first time…

    Finally! Exposed! The Deficit Myth! So, David Cameron When Are You Going to Apologise? “A lie gets halfway around the world before the truth has a chance to get its pants on”
    – Winston Churchill
    As a Conservative I have no pleasure in exposing David Cameron’s deficit claims. However, as long as the party continues to talk down the economy via the blame game, confidence will not be given an opportunity to return. For it is an undeniable and inescapable economic fact: without confidence and certainty there can be no real growth.
    Below are the three deficit claims – the mess. The evidence comes from the IMF, OECD, OBR, HM Treasury, ONS and even George Osborne. The claims put into context are:
    CLAIM 1
    The last government left the biggest debt in the developed world.
    After continuously stating the UK had the biggest debt in the world George Osborne admits to the Treasury Select Committee that he did not know the UK had the lowest debt in the G7? Watch: Also, confirmed by the OECD Those who use cash terms (instead of percentages) do so to scare, mislead and give half the story.
    Its common sense, in cash terms a millionaire’s debt would be greater than most people. Therefore, the UK would have a higher debt and deficit than most countries because, we are the sixth largest economy. Hence, its laughable to compare UK’s debt and deficit with Tuvalu’s who only have a GDP/Income of £24 million whilst, the UK’s income is £1.7 Trillion.
    Finally, Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% – a near 22% reduction page 6 ONS Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?
    CLAIM 2
    Labour created the biggest deficit in the developed world by overspending.
    Firstly, the much banded about 2010 deficit of over 11% is false. This is the PSNB (total borrowings) and not the actual budget deficit which was -7.7% – OBR Economic and Fiscal Outlook March 2012 page 19 table 1.2
    Secondly, in 1997 Labour inherited a deficit of 3.9% of GDP (not a balanced budget ) and by 2008 it had fallen to 2.1% – a reduction of a near 50% – Impressive! Hence, it’s implausible and ludicrous to claim there was overspending. The deficit was then exacerbated by the global banking crises after 2008. See HM Treasury. Note, the 1994 deficit of near 8% haaaaaah!
    Thirdly, the IMF have also concluded the same. They reveal the UK experienced an increase in the deficit as result of a large loss in output/GDP caused by the global banking crisis and not even as result of the bank bailouts, fiscal stimulus and bringing forward of capital spending. It’s basic economics: when output falls the deficit increases.
    Finally, the large loss in output occurred because the UK like the US have the biggest financial centres and as this was a global banking crises we suffered the most. Hence, the UK had the 2nd highest deficit in the G7 (Not The World) after the US and not as a result of overspending prior to and after 2008- as the IMF concur.
    CLAIM 3
    Our borrowing costs are low because the markets have confidence in George Osborne’s austerity plan and without it the UK will end up like Greece.
    Yes, the markets have confidence in our austerity plan and that’s why PIMCO the worlds largest bond holder have been warning against buying UK debt.
    The real reason why our borrowing costs have fallen and remained low since 2008 is because, savings have increased. As a result, the demand and price for bonds have increased and as there is inverse relationship between the price of bonds and its yield (interest rate) the rates have fallen. Also, the markets expect the economy to remain stagnate. Which means the price for bonds will remain high and hence, our borrowing costs will also remain low.
    Secondly, the UK is considered a safe heaven because, investors are reassured the Bank of England will buy up bonds in an event of any sell off – which increases the price of bonds and reduces the effective rate. Note, how rates fell across the EU recently when the ECB announced its bond buying program. Thirdly, because, we are not in the Euro we can devalue our currency to increase exports. Moreover, UK bonds are attractive because, we haven’t defaulted on its debt for over 300 years.
    David Cameron would like people to believe the markets lend in the same way as retail banks lend to you and I.
    Overall, when the facts and figures are put into context these juvenile deficit narratives and sound bites (“mere words and no evidence”) simply fail to stand up to the actual facts. The deficit myth is the grosses lie ever enforced upon the people and it has been sold by exploiting people’s economic illiteracy.
    So, David Cameron when are you going to apologise?
    Cameron is playing the blame game to depress confidence and growth to justify austerity. Secondly, to use austerity as justification for a smaller state to gain lower taxes. Thirdly, to paint Labour as a party that can not be trusted with the country’s finances again. Therefore, we Conservatives will win a second term because, people vote out of fear. The latter strategy worked the last time in office (18 years) and will work again because, in the end, elections are won and lost on economic credibility. Hence, as people believe Labour created the mess they won’t be trusted again.
    Finally, as the truth is the greatest enemy of the a lie I urge you to share this on Facebook, Twitter, blogs, text and email etc etc. So the truth can be discovered by all. Finally, have no doubt, people have been mislead by the use of the following strategy:
    “If you tell a lie big enough and keep repeating it, people will eventually come to believe it” Joseph Goebbels


    • Cameron

      Capitalism with Asian characteristics as the new measure of progress? Mahjong anyone?

    • Colonel Mustard

      If you are a Conservative I’m a Dutchman.

  • efhrrgnhtfhthtr

    Osborne should be fired for his ineptitude

    Sign this petition to restrict Bulgarian and Romanians from entering the UK:

    • Cameron

      On what grounds?

  • Des Brown

    There are two ways of looking at this. In truth, it’s of little significance that the UK’s rating is downgraded from AAA to AA1. The USA, Japan and France don’t have AAA ratings – only Canada and Germany amongst the major economies do.

    However, it is significant that the Chancellor staked his economic competence on the AAA rating. It’s much like the Labour Government coming to office in 1964 and staking their reputation on defending sterling. By November 1967, they were forced to devalue and Chancellor James Callaghan was gone. For Osborne, this is his ‘Pound in your pocket’ moment.

    • Daniel Maris

      The USA has the world’s reserve currency. The Japanese debt is owned almost exclusively by Japanese people, so it’s not a debt external to the economy. France is in the la merde.

  • oscar101

    George Osborne is in the privileged position of being able to set his own targets (unlike most other employees in the UK). The fact that he can’t even achieve targets he has set himself makes him look incompetent, and it undermines his (and David Cameron’s) whole economic policy, as the austerity measures they have implemented have been designed to retain the AAA credit rating the UK has now lost.

    There is no doubt that UK public expenditure and borrowing needs to be reduced, but the way George Osborne has tried to achieve this reflects ideological beliefs, not sound economic thinking…His primary ambition has been to make life politically difficult for the Labour Party – economic management and public welfare have been of secondary concern…This strategy has now backfired completely and utterly.

    The honourable thing to do would be to resign (which I sincerely doubt he will do). Perhaps he could be given a job as chief political strategist for the Conservatives for the next election. Hopefully he will do as good a job in this role as he has done as Chancellor and we will see the back of this incredibly inept and uncaring government…

  • Tom Tom

    The US losing its AAA rating does not deter the Fed from buying US Federal Bonds as Bernanke seems to have unlimited faith in the US Treasury

  • Steve Redmond

    Conservatives in the UK like the US have FAILED and their anti-worker policies wrapped in austerity are a huge error in the economics of obtaining prosperity. Rather than admit they are wrong, they follow what they think is Churchill’s steadfastness. However, Churchill knew how to change paths unlike these doltish and brutish politicians who haven’t a clue as to what they are doing.Now the UK has been downgraded from its triple a rating and soon will sink further> It is clear that austerity as cooked up by Cameron, Osborn and the old line monied is a complete fiasco. Still, it isn’t too late to change in drection but without sweeping them out of office the British people haven’t a chance to save their economy and country.from impoverishment.

    • the viceroy’s gin

      Well, state and local governments in the US continue to engage in austerity, unlike the UK government and the US federal government, which both are still spending madly.

      Had the Cameroons actually engaged in austerity, at any level, rather than spending madly everywhere, perhaps they might have opened up a bit of room for economic growth these past couple years, to at least match the US’ small gains.

      • Tom Tom

        US States are forbidden from running deficits

        • the viceroy’s gin

          Of course they can run deficits. They all borrow money, to one degree or another, and that means they’re running a deficit.

          You need to check individual states’ credit ratings, to understand how they stand fiscally. It’s really no different than the US and UK federal governments, in that respect. It’s just that individual states can become pockets of fiscal sanity, while others act like the US and UK governments.

    • Tom Tom

      Churchill was a totally incompetent Chancellor of the Exchequer

      • The Red Bladder

        I hope that you are not, for one moment, suggesting that…. No you couldn’t be!

        • Tom Tom

          Chamberlain spent his time 1931-1937 trying to repair the damage Churchill did as Chancellor with his Defence Cuts and Return to Gold at $4.8675 engendering a General Strike

          • The Red Bladder

            Throughout his pre-1940 life he often appeared to lose touch with all reality. Probably as complex a character as the British political system has ever thrown up. Even after getting on for 50 years after his death the various, often subtle, shades of his personality and convictions still puzzle many. Strangely, perhaps, a very telling picture of him came from, of all people, Harold Wilson in his book ‘A prime minister on prime ministers’. Throughout the war years the two often worked closely together and the picture painted is far more affectionate and understanding than might be imagined.

    • Archimedes

      I believe that Labour were looking to increase NI as part of their deficit reduction strategy. Osborne choose to increase consumption taxes instead. Yes, with Labour, GDP might have been marginally higher, but unemployment would have been a lot higher.

      Not sure why you think that the Conservatives are “anti-worker”.

  • Daniel Maris

    Vainglory writ large, now trampled in the dust. Osborne brought it all on himself through his lack of understanding of the lives of ordinary people and being completely unable to engage with them.

    He scared the working public witless. Consumer confidence collapsed. And now we are stuck in quasi-recession (real recession if you include the mass immigration, supported by Osborne, diminishing per capita GDP).

  • qdiscqus

    So, Osborne, how’s that austerity working out for you?

    • Daniel Maris

      Yep, he got all leathered up, put on the gimp mask of austerity, went down into the dungeon of cuts and ended up finding out he was on the receiving end.


      • Archimedes

        What would you have done, Dan?

        • the viceroy’s gin

          …build windmills.

          …lots and lots of windmills.

          …with borrowed public money, of course.

          • Daniel Maris

            Yes, I’d certainly build wind turbines (and put in place PV panels), using mostly stamp duty receipts rather than borrowing money. I would also have created Energy Bonds and used QE to purchase those (more so than using them to keep banks afloat).

            • Archimedes

              Right, Dan. What happens when those Energy Bonds become worthless, and the BoE starts leaking cash as a result of poor asset purchases?

              That’s why you’re not BoE governor, Dan.

              • Daniel Maris

                They wouldn’t be worthless, as you are purchasing a real energy generating piece of machinery guaranteed to produce income for at least 20 years. If you use Stamp Duty taxation to subsidise the construction of the turbines etc, you can set the bond level at whatever figure it might be to pretty much guarantee a profit. But note – onshore wind turbines don’t require a lot of subsidy. PV panels though do.

                • berosos_bubos

                  Why not get the private sector to build coal fired power stations like Germany ?

            • the viceroy’s gin

              Yes, massive new debt… and windmills.

              It’s a brilliant plan.

        • Daniel Maris

          I would have put in place a public sector recruitment freeze, avoided use of the word austerity and looked to the real economy, rather than Osborne’s banker chums for guidance.

          • Archimedes

            That’s why you’re not Chancellor, Dan.

            • Daniel Maris

              I doubt it’s the only reason Archimedes, but note that is a form of ad hominem argument as you haven’t tackled what I said.

              I would also note that from the very start I said the Chancellor was a making a very big mistake by encouraging austerity gloom. That’s not my view alone – many commentators now see how his attack on public sector jobs (as opposed to recruitment) was a key factor in collapsing consumer confidence, which was enough to stifle the growth recovery.

    • Tom Tom
  • Grrr8

    Yeesh, one can see everyone piling on to this like maggotts on s*&t. I haven’t even clicked into Fraser’s take yet (lower taxes I suspect?).

  • Deepsnoozer

    George Osborne should resign for the good of the country.

    • Archimedes

      No he shouldn’t. He should do as he said and take this as an opportunity to “redouble” his efforts.

      • Tom Tom

        “Efforts” ? What “Efforts” is he making ? He is completely at sea and thought he could do a Geoffrey Howe – crash the economy, create a deep recession and float on a tide of North Sea Oil and a foreign war to win the next election. The only bit missing in 2013 is the North Sea Oil

      • Deepsnoozer

        How many chances should he be given with the economy? He’s had one and has failed by any measure. He should go.

      • George_Arseborne

        There is no effort. What is he redoubling? The DEBT? We knew how Economically illiterate George Osborne was at the beginning of this government. He is a failure he should resign abd give way to Philip Hammond

  • Colin

    OK, so that’s that particular fox well and truly shot. Now can we get on with some serious tax cutting please?

    • the viceroy’s gin

      Oh go on! There’s a new litter of foxes born with every fresh run of King Mervyn’s printing press.

      So, there’ll be foxes shot from now until the rating hits triple Z.

      Best bring back the dog packs and the funny men in red jackets jouncing about. The foxes are soon to be as locusts.

      • Daniel Maris

        Caution: Image Overload.

        • dalai guevara

          Why so? Metaphors can enrich the lives of those who would otherwise face reverting to the blandness of unintended equine dining.

          • Daniel Maris

            Solo dining in the case of our rude American cousin.

  • David Lindsay

    I am no fan of the rating agencies. But George Osborne is. And the Triple A rating is gone. Therefore, Osborne and the Coalition ought to be gone, too.

    • Raimo Kangasniemi

      Utterly self-inflicted debacle for the LibCons. Nobody forced them to take this kind of goal that depended on what American English literature majors etc working for utterly unregulate credit agencies happen to decide on a whim.

      • David Lindsay

        I quite agree. But that was what they did. They chose this goal. And they have failed to achieve it. Both for the choice and for the failure, away with them. Above all, away with George Osborne.

    • Archimedes

      He should be given credit for not coming out with statements of rating agency conspiracy theories, and threats against them, like some other countries that were downgraded. He handled this with aplomb.

  • Magnolia

    The US has the world’s reserve currency, we do not.

    • millenialkid

      But there’s nothing to fear. Technically, the US has AA+ credit rating from S&P also– ie Standard & Poor’s downgraded the U.S.’s triple-A credit rating to AA-plus on Aug 6, 2011, and the money still spends.

  • The Red Bladder

    Should it comes to pass that the Conservative party fails to take the seat in Eastleigh this might prove to be a few rough days for them then. Not that they have brought it on themselves of course!

    • Ron Todd

      They were likely to lose Eastleigh anyway all that will change is the size of the loss.

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