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United Kingdom Outlook Revised To Stable; 'AAA' Ratings Affirmed

Publication date: 26-Oct-2010 06:11:01 EDT

  • In our opinion, the decisions reached by the United Kingdom coalition government in its 2010 Spending Review reduce risks to the government's implementation of its June 2010 fiscal consolidation program.
  • Moreover, the coalition parties have shown a high degree of cohesion in putting the U.K.'s public finances onto what we view to be a more sustainable footing.
  • We have accordingly revised the outlook on the United Kingdom to stable from negative.
  • We have also affirmed the 'AAA/A-1+' sovereign credit ratings on the United Kingdom.
LONDON (Standard & Poor's) Oct. 26, 2010--Standard & Poor's Ratings Services 
said today that it revised its outlook on the United Kingdom to stable from 
negative. At the same time, Standard & Poor's affirmed its 'AAA' long-term and 
'A-1+' short-term sovereign credit ratings on the U.K. The transfer & 
convertibility assessment remains 'AAA'.
     "The ratings on the U.K. reflect our view of the country's wealthy and 
diversified economy, fiscal and monetary policy flexibility, and relatively 
adaptable product and labor markets," said Standard & Poor's credit analyst 
Trevor Cullinan. In addition, we view the U.K. as having deep capital markets 
with strong demand for long-dated gilts by domestic institutional investors. 
There is also demand from nonresidents for sterling-denominated U.K. 
government debt, which provides some diversification to the U.K.'s investor 
     In our opinion, the Conservative/Liberal Democrat coalition government's 
policy objective to close the fiscal gap further underpins the ratings. We 
believe that the completion of the government's Spending Review, announced on 
Oct. 20, 2010, reduces uncertainties about its political resolve to tackle the 
challenges resulting from the structural deterioration in public finances 
between 2007 and 2009. This deterioration led to an increase in gross general 
government debt of 24 percentage points of GDP over that period--more than in 
most other 'AAA' rated sovereigns.
     In our base case, we now project the general government gross and net 
debt burdens to peak in 2013 at about 84% and 80% of GDP, respectively, before 
gradually declining. We now expect that the estimated general government 
deficit of 11.2% of GDP in 2009 could narrow to approximately 3% of GDP in 
2014. This 3% figure is lower than our 4% forecast in June and is based in 
part on the assumption that the government will implement most of its 
now-well-specified fiscal-consolidation program. However, our forecast is 
higher than the official forecast of 2.2% in 2014-2015. We expect economic 
growth in the U.K. to average 2% over the next five years, slightly weaker 
than the 2.4% forecast by the Office for Budget Responsibility (OBR), based on 
our view that a rebalancing of the economy away from credit-fuelled private 
consumption and toward a higher contribution from more externally focused 
sectors will likely proceed more slowly than the OBR assumes. In our view, 
this rebalancing may also lead to less tax-rich growth than that underlying 
the OBR forecast. 
     In our view, the U.K. government has strong administrative capacity to 
achieve the expenditure control and revenue raising laid out in its fiscal 
consolidation plan. However, we have factored in the potential for some 
marginal slippage with regard to the implementation of such a substantial 
fiscal consolidation program.
     "We expect that the government will implement most of its expenditure-led 
fiscal consolidation program, which we believe is likely to cause the net 
general government debt burden to peak at approximately 80% of GDP in 2013 and 
decline thereafter," said Mr. Cullinan. The ratings could come under downward 
pressure if, against our expectations, the coalition's commitment to fiscal 
consolidation faltered to the extent that it would result, in our view, in a 
sustained increase in the general government debt burden as a percentage of 

     Complete ratings information is available to RatingsDirect subscribers on 
the Global Credit Portal at and RatingsDirect 
subscribers at All ratings affected by this rating 
action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow (7) 495-783-4011.
Primary Credit Analyst:Trevor Cullinan, London (44) 20-7176-7110;
Secondary Contact:David T Beers, London (44) 20-7176-7101;
Additional Contact:Sovereign Ratings;

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