S&P Gets Negative on UK

As draft legislation is honed in the European Union putting limits on what credit ratings agencies can say in analysis and when they can say it in reference to member nations, one of the so-called “Big Three” agencies has placed the United Kingdom into pessimistic outlook territory.

Though Standard & Poor’s affirmed the UK’s “AAA” rating Thursday, the U.S.-based agency revised its long-term ratings outlook to negative from stable and noted a “one in three chance” a ratings downgrade could come in the next two years if fiscal health continues to weaken there.

“We believe this could occur in particular as a result of a delayed and uneven economic recovery, or a weakening of political commitment to consolidation,” S&P wrote.

Like most ratings downgrades or threats of them, it’s not being taken kindly, especially in Europe (see this week’s eNews for more on the EU’s draft legislation to limit ratings agencies activity). However, despite fears from governments struck by downgrades and outlook changes, New York University’s Ed Altman, PhD, who will making an encore appearance as a speaker at the (May) 2013 NACM’s Credit Congress Las Vegas, said the impact of such moves has been shown to be muted. He said France, which lost its prized “AAA”-level rating with two of the three big agencies in 2012, is a prime example.

“While the ratings have taken a hit with downgrades, the yields and the spreads have actually decreased in France, which is very hard to explain,” Altman told NACM. “In other words, if you had acted on that information in terms of investment decision, you would have been wrong. France, if anything, has improved in its situation. I’m not saying markets are ignoring the ratings agencies completely, but they don’t seem to be taking them too seriously in regards to investment grade countries.”

He added that market-watchers are aware of the agencies’ somewhat spotty track record from last decade and don’t rely on them solely when making decisions and analysis.

-Brian Shappell, CBA, NACM staff writer

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