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Analysts warn of risk to AAA rating

Analysts have warned that the UK’s AAA rating could still be at risk despite Chancellor Alistair Darling’s optimistic growth outlook.

All three ratings agencies have previously warned that the UK’s AAA rating was at risk without significant spending cuts. Moody’s warned on Wednesday that “public finances are deteriorating considerably and may therefore test the AAA boundaries”.

It added that this would “have to be validated by actions in the not too distant future to continue to provide support for the rating”.

But experts are not confident that the pre-Budget report addressed the ratings agencies’ fears adequately enough.

Caxton FX senior analyst Duncan Higgins says: “This report has done little to assuage ongoing fears of the UK’s fiscal debt. With increased borrowing planned for next year, concerns will linger over the possibility that the UK’s AAA rating may come under threat.”

Royal London Asset Management economist Ian Kernohan says: “Perhaps we should be looking across the Irish Sea for a glimpse of the future.”

He warns that both Labour and the Conservatives are not being candid enough with voters ahead of a spring election when it comes to spelling out where cuts will fall.

Kernohan says: “Unless a deficit reduction programme is deemed credible by the rating agencies, the UK’s sovereign rating will come under question, which will push up gilt yields and the cost of debt servicing, making the problem worse.”

Schroders fund manager Warren Hyland says there is a clear difference in opinion on UK growth between the International Monetary Fund and the UK Government. The IMF says UK debt to GDP ratios will be at 98.3 per cent in 2014.

He says: “The debt/GDP ratio should fall from 2011 onward to be consistent with the AAA rating but that is clearly not the case. Overall, the Budget was negative for gilts and we expect that the yield curve will become steeper and that rates will rise. This is negative for a sovereign rating.”

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