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Britain faces likely debt rating downgrade on S&P's revision

BRITAIN faces the unsettling possibility of seeing its debt rating downgraded, after credit ratings firm Standard & Poor's said yesterday that it has revised the country's outlook to negative from stable.

Though the ratings agency reaffirmed the country's actual long-term credit rating at "AAA" and its short-term rating at "A-1+," it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

The outlook revision does not trigger a formal reevaluation of Britain's rating - unlike being put on credit watch - but does mean that policy makers have to be aware that a downgrade may happen if public finances are not put on the straight and narrow in the near future.

The pound slumped by over 2 US cents to just below US$1.56 after the news, while the FTSE share index fell more than 100 points, or around 2.3 percent.

This is the first time Britain has been put on the negative list since S&P started rating the outlook of the country's public finances in the early 1980s.

S&P said the downward revision reflects a more cautious view of how quickly the country's finances can be repaired and its projections incorporate new estimates of the cost of the government's bailout of the banking sector. It now estimates that the government's net debt burden will rise to nearly 100 percent of economic output by 2013.

"These projections reflect our more cautious view of how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow," said S&P's credit analyst David Beers.

"The rating could be lowered if we conclude that, after the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," he said.


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