Credit rating agencies failed to downgrade the UK in time, academics from the Cardiff Business School say, arguing the UK should have instead been downgraded in the aftermath of
the run on Northern Rock in September 2007.
Vito Polito, a lecturer in economics, and Michael Wickens, a professor of economics, say their research provides a model-based measure of the sovereign credit rating that contrasts with that of credit ratings agencies.
Their model downgrades the UK during the early phase of the financial crisis, which coincides with the unprecedented deterioration of the UK public finances.
Moody’s downgraded the UK in February this year and Fitch in April, but the academics say the country should have been downgraded “much earlier”.
“Between 2008 and 2010, only Greece, Iceland and Ireland have accumulated deficits as a proportion to GDP higher than the UK,” Polito says. “The UK debt-GDP ratio almost doubled over the same period of time. From the point of view of our model, it is inevitable that this sharp deterioration of the UK fiscal stance leads to a downgrade.”
Polito says starting from late 2010, the rating obtained from the model begins to recover towards AAA, although there is a large degree of uncertainty about its value by the end of 2012.
Deficit as a proportion to GDP was stable in 2010 and it halved by 2012, he says, adding that this means the pace of the increase in the debt-GDP ratio has slowed considerably.
Polito highlights the importance of transparent and timely measurements of the credit rating.
Although Fitch Ratings downgraded the UK’s long-term foreign and local currency issuer default ratings to AA+ from AAA, it considers the country’s outlook to be “stable”.
In a statement dated April 19, Fitch Ratings said the downgrade followed the conclusion of a review of the UK’s sovereign ratings that started on March 22 when the UK was put on “rating watch negative”.
Prior to that, the UK had a “negative” outlook.
In a statement dated February 22, Moody’s says the main driver behind its decision to downgrade the UK’s government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years.
This is likely a result of slow growth worldwide as well as the domestic and private deleveraging in the UK specifically.
Neither Fitch Ratings nor Moody’s were immediately available to comment on the Cardiff Business School research.
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