Overview

  • We believe that the U.K. government's decision to hold a referendum on EU membership by 2017 indicates that economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated, similar to the situation in the U.S. when we lowered that sovereign rating in 2011.
  • A possible U.K. departure from the EU also raises questions about the financing of the economy's large twin deficits and high short-term external debt.
  • We are therefore revising the outlook to negative from stable and affirming the 'AAA/A-1+' ratings on the U.K.

Rating Action

On June 12, 2015, Standard & Poor's Ratings Services revised its outlook on 
the United Kingdom to negative from stable. At the same time, we affirmed our 
unsolicited 'AAA/A-1+' long- and short-term sovereign credit ratings.

We also affirmed the 'AAA/A-1+' long- and short-term issuer credit ratings on 
the Bank of England (BoE) and the 'AAA/A-1+' ratings on the debt program of 
Network Rail Infrastructure Finance PLC. We have revised the outlook on the 
BoE to negative from stable.

Rationale

The outlook revision reflects our view that the decision of the newly elected 
Conservative majority government to hold a referendum on the U.K.'s EU 
membership by 2017 represents a risk to growth prospects for the U.K.'s 
financial services and export sectors, as well as the wider economy. We 
believe a possible U.K. departure from the EU also raises questions about the 
financing of the U.K.'s large twin deficits and its high private short-term 
external debt.

It is also our view that the calling of a referendum on EU membership 
indicates that economic policymaking could be at risk of being more exposed to
party politics than we had previously anticipated, similar to the situation in
the U.S. when we lowered that sovereign rating in 2011. In the case of the 
U.K., we believe that the decision to propose a referendum, with all the 
economic risks that such a decision entails, was at least partly driven by the
government's intention to contain the influence of the eurosceptic U.K. 
Independence Party (UKIP). We also believe that the referendum is aimed at 
strengthening unity inside the Conservative Party, which has a strong 
eurosceptic wing. The Conservatives now have a narrow 12-seat majority, having
obtained 36.9% of the national vote in the May 7, 2015, general elections (up 
0.8% compared with 2010,and displaying strong regional differentiation, with 
41% in England and only 15% in Scotland).UKIP's 12.6% of the national vote (up
by 9.5%) could suggest that this strategy has so far not been successful. 
While UKIP gained only a single seat, it ended second in 120 of the 650 
national constituencies, overwhelmingly in England.

In our opinion, the outcome of the general election could make consensus-based
policymaking more challenging. We believe that the results of the recent 
general elections could, moreover, complicate the post-referendum scenario in 
Scotland should the U.K. decide to leave the EU. Our understanding is that, as
the newly elected U.K. government enters into negotiations with its EU 
partners for potential treaty change, the aim is to agree at the same time 
upon a constitutional settlement devolving wide-ranging powers to Scotland. We
find these objectives ambitious and may well take precedence over other policy
imperatives, such as how to address the supply bottlenecks in U.K. 
infrastructure and in the housing market (see "Building For Growth: Can The 
U.K. Close Its Infrastructure Investment Deficit?" published Nov. 17, 2014, on
RatingsDirect).

In our opinion, there are important risks to the U.K.'s longer-term economic 
prospects should it leave the EU, with implications for external financing and
the role of sterling as a reserve currency, although this would also depend on
what sort of relationship with Europe and the single market the U.K. could 
negotiate were it to leave the EU. The U.K. benefits from its flexible open 
economy, which we judge to have prospered inside the EU. We believe the U.K.'s
EU membership has enabled the economy to attract higher inflows of low-cost 
capital and skilled labor than it would have attracted without access to the 
single market. It is our view that significant net immigration into the U.K. 
over the past decade has improved the sovereign's economic and fiscal 
performance.

For purposes of determining external vulnerabilities, we assess that the U.K. 
benefits from a reserve currency, alongside the U.S. and Japan. This leads to 
a more supportive external assessment, despite the U.K.'s very high net 
external debt. Under our methodology, were sterling's share of allocated 
global central bank foreign currency reserve holdings to decline below 3%, 
then we would no longer classify it as a reserve currency (sterling's share 
was 3.8% as of year-end 2014, according to International Monetary Fund data, 
compared with 52.5% for the U.S. dollar, and 4.0% for the Japanese yen). The 
loss of sterling as a reserve currency could lead us to lower the 'AAA' rating
on the U.K. by one notch.

Since it joined the European Community 42 years ago, the U.K. has attracted 
substantial foreign direct investment (FDI), solidifying its role as a global 
financial center. At an estimated $1.6 trillion (57% of GDP), the absolute 
stock of inward FDI (OECD data published December 2014, which excludes 
special-purpose entities and resident affiliates' equity in and lending to 
foreign parents) in the U.K. is the third-highest in the world, representing 
6.3% of the global total, well above the U.K.'s 4% share of global GDP. High 
FDI inflows into the U.K. have increased the capital stock in an economy that 
stands out for its low share of investment in GDP. At an estimated 17% of GDP 
this year, the U.K.'s investment-to-GDP ratio is the lowest of 'AAA' rated 
sovereigns (see interactive sovereign risk indicators at www.spratings.com/sri
). This underscores the heightened importance of FDI inflows for the U.K.'s 
economic growth prospects. Two-thirds of all inbound FDI into the U.K. 
represents investment in the services sector, primarily into the financial 
services sector centered in the City of London. Whereas we believe that London
will remain an important European financial center even in the case of an EU 
exit, investment decisions by financial firms in the future in favor of other 
destinations could depress growth and fiscal performance.

On a flow basis, net FDI is a major source of financing for the U.K.'s current
account deficit, which has remained in deficit without interruption since 
1984. Net FDI financed most of the U.K.'s 2014 current account deficit of 5.5%
of GDP, which was the world's second-largest in absolute dollar terms.

When we revised our outlook on the 'AAA' rating on the U.K. to stable one year
ago, we projected that the current account deficit would narrow during 2014. 
Instead, it has widened to unprecedented levels. While this partly reflects 
weak demand in the U.K.'s key European markets, the more important driver has 
been a shift of the net income component of the current account into a 
substantial deficit of $63 billion (or just over 2% of GDP). Temporary factors
that have pushed up the net income deficit include large one-off fines paid to
foreign governments by several of the U.K.'s banks and multinational 
corporations. The U.K. dividend and interest payments to the rest of the world
have also increased, whereas earnings on investments abroad have declined 
since 2011, reflecting both the permanent reduction in U.K. banks' stock of 
investments abroad and the potentially temporary weaker performance of U.K. 
investments in the eurozone, due to a more lagged recovery across the channel,
as well as foreign exchange effects.

We see the U.K.'s high external deficits as a vulnerability to the economy, 
particularly because we view a possible EU departure as a risk to non-debt 
financing sources. On our preferred external liquidity metric, the U.K. 
performs weaker than any other of the 129 sovereigns rated by Standard & 
Poor's: gross external financing needs as a share of the sum of current 
account receipts and usable foreign exchange reserves are expected to stand at
810% in 2015, compared with 336% for the U.S. and an 'AAA' median of 192% (see
www.spratings.com/sri).

At 83% of GDP (2015 estimate), the U.K.'s net general government debt ratio is
slightly higher than that of the U.S. (80%) and is the most elevated among all
'AAA' rated sovereigns (followed by Germany at 68%; the 'AAA' median stands at
23%, see www.spratings.com/sri). Since the 2008 financial shock to the U.K.'s 
fiscal position, consolidation has been substantial, and primarily in the form
of cuts to general government expenditure, which as of last year was below 
2008 levels as a percentage of GDP. For 2015, we project that the steady 
reduction in net public borrowing will continue, as the general government 
deficit is, according to our projections, in line to narrow to 4.2% of GDP 
from an estimated 5.7% of GDP in 2014 (on a calendar year basis). Our 
budgetary projection for 2015 (calendar year) has somewhat improved compared 
with what we published at this time last year, given the stimulus to receipts 
from recovering real wage growth.

At the same time, we see the government's target to reduce public-sector net 
borrowing from 4% of GDP during the fiscal year ending March 2016 to 2% of GDP
by the fiscal year ending March 2017, as optimistic. We believe meeting this 
target will prove to be difficult given our understanding that most of the 
planned reduction is set to take place by reducing benefits and other current 
public expenditure, without touching health or pensions. We also expect that 
receipts from the oil and financial services sectors will not recover to 
pre-crisis levels. If the government sells its remaining stakes in Royal Bank 
of Scotland and Lloyds sooner than we expect, we could trim our forecasts for 
net general government debt by close to 2% of GDP.

The affirmation of the 'AAA' rating reflects our opinion that the U.K. 
continues to exhibit high labor- and product-market flexibility, and a wealthy
and diversified economy. We view the U.K.'s monetary flexibility and the 
sterling's reserve currency status as key credit strengths. We also consider 
the transparency, strength, and stability of the U.K.'s civil institutions to 
be an enduring rating strength.

Outlook

The negative outlook reflects our opinion that there is at least a 
one-in-three probability of a downgrade over the next two years. In our 
opinion, the process of holding a referendum on the U.K.'s membership of the 
EU is evidence of increasing risks to the effectiveness, stability, and 
predictability of the U.K.'s policymaking. This in turn could negatively 
affect sustainable public finances, balanced economic growth, and the response
to economic or political shocks.

We could lower the ratings if we were to take the view that our concerns about
the adverse shifts in the political environment had become more tangible, 
especially if we were to discern negative implications for investment and 
growth. Should we conclude that departure from the EU is likely over the 
medium term, we could lower the rating by potentially more than one notch, 
depending on the circumstances, such as the expected future relations with the
EU. The ratings could also come under pressure if net general government debt 
reached 100% of GDP (compared with our current expectation that it will peak 
at about 82% in 2016), or if the sterling were to lose its reserve currency 
status, because we would view this as a weakening of the economy's ability to 
carry a net external liability position.

We could revise the outlook to stable should the policymaking environment 
display degrees of effectiveness, stability, and predictability similar to 
that in the past, and should economic growth remain robust, the sterling 
maintain its reserve currency status, and the U.K.'s large fiscal and external
deficits continue to narrow. The outlook could also be revised to stable were 
net general government debt to decline below 80% of GDP faster than currently 
projected, for example due to government asset sales.

Key Statistics

Table 1

United Kingdom Selected Indicators
20082009201020112012201320142015f2016f2017f2018f
Nominal GDP (bil. US$)2,8142,3192,4092,5942,6242,6802,9512,8062,9053,2073,336
GDP per capita (US$)45,88837,58138,82041,55441,79942,45046,51343,96545,24549,64151,339
Real GDP growth (%)(0.3)(4.3)1.91.60.71.72.82.82.62.12.1
Real GDP per capita growth (%)(0.9)(4.9)1.31.10.11.12.32.22.01.51.5
Change in general government debt/GDP (%)9.212.813.88.25.94.45.94.43.22.72.2
General government balance/GDP (%)(5.1)(10.8)(9.7)(7.6)(8.3)(5.7)(5.7)(4.2)(3.0)(2.5)(2.0)
General government debt/GDP (%)51.865.876.481.885.887.389.489.488.587.786.5
Net general government debt/GDP (%)46.559.270.875.079.280.582.882.982.281.580.3
General government interest expenditure/ revenues (%)5.34.87.27.97.37.17.16.76.76.76.7
Other dc claims on resident non government sector/GDP (%)200.2201.3191.0175.5166.8155.9141.3139.1137.4136.1134.7
CPI growth (%)3.62.13.34.52.82.51.50.11.82.32.3
Gross external financing needs/CARs plus usable reserves (%)824.01,092.4911.9842.9929.2895.3845.3853.2819.3779.4738.6
Current account balance/GDP (%)(3.7)(2.8)(2.6)(1.7)(3.7)(4.4)(5.5)(4.6)(3.5)(3.1)(2.4)
Current account balance/CARs (%)(7.8)(7.1)(6.4)(3.8)(9.0)(11.0)(14.5)(11.8)(8.8)(8.0)(6.0)
Narrow net external debt/CARs (%)216.9347.4461.2423.5451.0489.9488.1514.7499.6451.5416.2
Net external liabilities/ CARs (%)(9.6)34.715.09.635.860.848.962.466.768.869.6
Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. f--Forecast. The data and ratios above result from Standard & Poor's own calculations, drawing on national as well as international sources, reflecting Standard & Poor's independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

United Kingdom Ratings Score Snapshot
Key rating factors
Institutional assessmentStrength
Economic assessmentStrength
External assessmentStrength
Fiscal assessment: flexibility and performanceNeutral
Fiscal assessment: debt burdenWeakness
Monetary assessmentStrength
Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Rating Methodology," published on Dec. 23, 2014, summarizes how the various factors are combined to derive the sovereign foreign currency rating, while section V.C details how the scores are derived. The ratings score snapshot summarizes whether we consider that the individual rating factors listed in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts of "strength", "neutral", or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated sovereigns will typically display more strengths, and lower rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign ratings methodology, a change in assessment of the aforementioned factors does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the assessments.

Related Criteria And Research


Related Criteria

Related Research

In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision. After the primary analyst gave opening remarks and 
explained the recommendation, the Committee discussed key rating factors and 
critical issues in accordance with the relevant criteria. Qualitative and 
quantitative risk factors were considered and discussed, looking at 
track-record and forecasts.

All rating factors were unchanged.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria and Research').


Ratings List

                                         Ratings                              
                                         To                   From            
United Kingdom
 Sovereign credit rating                                                      
  Foreign and Local Currency |U^         AAA/Negative/A-1+    AAA/Stable/A-1+ 
 Transfer & Convertibility Assessment                                         
  T&C Assessment |U^                     AAA                  AAA             
 Senior Secured                                                               
  Local Currency [#1]                    AAA                  AAA             
 Senior Unsecured                                                             
  Foreign Currency [#3]                  AAA                  AAA             
  Local Currency [#4] [#5]               AAA                  AAA             
 Commercial Paper                                                             
  Local Currency [#2]                    A-1+                 A-1+            

Bank of England
 Sovereign credit rating                                                      
  Foreign and Local Currency             AAA/Negative/A-1+    AAA/Stable/A-1+ 
 Senior Unsecured                                                             
  Foreign Currency                       AAA                  AAA             
 Short-Term Debt                                                              
  Foreign Currency                       A-1+                 A-1+            

CTRL Section 1 Finance PLC
 Senior Secured                                                               
  Local Currency[1]                      AAA                  AAA             

LCR Finance PLC
 Senior Unsecured                                                             
  Local Currency[1]                      AAA                  AAA             

Network Rail Infrastructure Finance PLC
 Senior Secured                                                               
  Foreign and Local Currency[1]          AAA                  AAA             
 Commercial Paper                                                             
  Local Currency[1]                      A-1+                 A-1+            

|U^ Unsolicited ratings with issuer participation and access to internal 
documents.
[1] Dependent Participant(s): United Kingdom
[#1] Issuer: Affordable Housing Finance PLC, OBLIGOR: United Kingdom
[#2] Issuer: Bank of Scotland PLC, Guarantor: United Kingdom
[#3] Issuer: Government of Turks and Caicos Islands, Guarantor: United Kingdom
[#4] Issuer: Barclays Bank PLC, Guarantor: United Kingdom
[#5] Issuer: Lloyds Bank PLC, Guarantor: United Kingdom

This unsolicited rating(s) was initiated by Standard & Poor's. It may be based
solely on publicly available information and may or may not involve the 
participation of the issuer. Standard & Poor's has used information from 
sources believed to be reliable based on standards established in our Credit 
Ratings Information and Data Policy but does not guarantee the accuracy, 
adequacy, or completeness of any information used. 


Complete ratings information is available to subscribers of RatingsDirect at 
www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by 
this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. 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) 783-4009.


Primary Credit Analyst:Frank Gill, Madrid (34) 91-788-7213;
frank.gill@standardandpoors.com
Secondary Contacts:Ravi Bhatia, London (44) 20-7176-7113;
ravi.bhatia@standardandpoors.com
Hugo C Foxwood, London (44) 20-7176-3781;
hugo.foxwood@standardandpoors.com
Additional Contact:SovereignEurope;
SovereignEurope@standardandpoors.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.