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UK rally threatened by sovereign debt downgrades

Britain’s stockmarket rally has been threatened by the possibility of sovereign debt downgrades.

Standard & Poor’s (S&P), the ratings agency, announced today that it has revised its outlook for Britain from “stable” to “negative” to reflect high levels of borrowing by the government.

The agency estimates that, even with additional spending cuts, the country’s net debt burden could reach 100% of GDP by 2013 and is likely to remain at that level over the medium term.

S&P affirmed the AAA long-term and A-1+ short-term sovereign ratings for Britain, however, and said in a statement that the economy is likely to be “supported by its wealthy, diversified economy; a high degree of fiscal and monetary policy flexibility; and its relatively flexible product and labour markets”.

Uncertainty about the future of the current administration, however, has generated concern about longer-term policy decisions to tackle the spiralling debt.

The report notes that despite cross party support for fiscal tightening, the actual shape of the reforms “will likely remain unclear until the next administration is formed after the general election, due by mid-2010”.

While doubt remains over the implementation of comprehensive measures the ratings agency says it is unlikely to reverse the downwards trajectory for Britain’s debt.

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