UK May Lose its Top Debt Rating

Darlington Musarurwa
21 May, 2009
New York City

European markets fell after UK was warned to get its public finances in order. S&P warned that UK may lose its top rating. Nations relying on exports to the U.S. are reporting large economic declines in the first quarter. Singapore, Japan, Germany and Mexico economies shrank 14.5% or more.

[R]9:30 AM New York – European markets turned negative after the UK was warned to get its public finances in order. S&P warned that UK may lose its top rating. Nations relying on exports to the U.S. are reporting large economic declines in the first quarter. Singapore, Japan, Germany and Mexico economies shrank at least 14.5% in the first quarter.[/R]

World markets are increasingly turning volatile with the mounting evidence of larger economic shrinkages in the nations relying on exports to the U.S. In the latest economic estimates for the first quarter from Mexico, Japan, Germany and Singapore showed double digit declines.

Singapore is the latest to join other nations with exports linked to U.S. with sharper economic declines. The economy shrank at annual rate of 14.6% after falling at a rate of 16.4% in the fourth quarter. On Wednesday, Mexico reported fall in output by 21.5%, on Tuesday Japan said the economy contracted 15.2% and Germany last week reported a fall in output of 14.4%.

Rating agencies are finally catching up with the wealthy nations’ government finances deteriorating rapidly. The shaky finances of UK forced at least one rating agency to fire a warning shot but the debt of the governments of U.S., Japan, Ireland, India and Australia are likely to balloon as well.

European markets were cautious after the rating agency Standard & Poor’s reaffirmed UK’s debt rating at the highest level but lowered the outlook negative. The government debt has surged with the recent increase in the Bank of England purchasing government debt to tune of 125 billion pounds and an increase in government guarantees to the bonds issued by the government.

The UK debt is likely to stay near 100% of its GDP creeping to the national debt levels of Greece, Italy and Japan.

In the current fiscal year ending in March 2010, the UK plans to sell 220 billion pounds and the government is likely to run a budget deficit of 175 billion pounds, nearly 12.4% of GDP. Separately, the Office of National Statistics said that the April budget deficit increased to 8.5 billion pounds, record high since the ONS maintained the statistics.

The U.S. federal debt is expected to surge above 80% in the current year and surpass 97% in 2010 and is estimated to stabilize at 100% thereafter. The IMF estimates that the EU-16 debt to reach 69% at the end of this year and UK debt may surge to near 95%.

The pound declined 0.7% against the euro and the U.S. dollar and the benchmark index FTSE 100 index dropped as much as 2.8%.

Asian Markets Review

The Nikkei 225 Index in Tokyo closed lower 80.49 or 0.86% to 9,264.15, Hang Seng index in Hong Kong decreased 276.35 or 1.58% closed to 17,199.49, CSI 300 index in China lower 62.86 or 2.23% closed to 2,750.01. ASX 200 index in Australia decreased 10.70 or 0.28% closed to 3,813.90. The KL Composite index in Malaysia lower 7.07 or 0.68% closed to 1,035.56.

The Kospi Index in South Korea decreased 14.05 or 0.98% to close at 1,421.65. SET index in Thailand closed lower 12.64 or 2.25% to 548.77.The Sensex index in India decreased 324.12 or 2.31% closed to 13,736.54. The Markets of Indonesia were closed today.

Europe Markets Review

In London FTSE 100 Index traded lower 92.64 or 2.07% to 4,375.77, in Paris CAC 40 Index decreased 48.24 or 1.46% to 3,255.13 and in Frankfurt DAX index traded lower 76.76 or 1.52% to 4,962.18. The Markets of Zurich were closed today.