Viewers of European CNBC early on Thursday morning will probably have seen Danske Bank making their case for cutting the UKâs credit rating by no fewer than four notches, from AAA to A+. (Which is about where Italy is at the moment.) Itâs an eye-catching call, especially just ahead of another Bank of England monetary policy decision⦠but actually Danske Bank analysts John Hydeskov and Hugo Railing have constructed the argument in an ironic fashion. Theyâve done it like a rating agency would: METHODOLOGY: In order to evaluate the United Kingdomâs credit rating we will use Standard and Poorâs rating methodology and assumptions for sovereigns from June 2011. This document includes detailed information on how S&P addresses the factors that affect a sovereign governmentâs willingness and ability to service its debt on time and in full. Like S&P, we will focus on five key factors that form the foundation of our analysis of the UK: - Institutional effectiveness and political risks, reflected in the political score. - Economic structure and growth prospects, reflected in the economic score. - External liquidity and international investment position, reflected in the external score. - Fiscal performance and flexibility, as well as debt burden, reflected in the fiscal score. - Monetary flexibility, reflected in the monetary score. To the best of our abilities, we have assigned a score to each of the five key factors on a six-point numerical scale from â1′ (the strongest) to â6′ (the weakest)⦠S&P themselves continue to keep the UK on a stable outlook of course and thereâs no sign that this is changing. Itâs an arresting conceit anyway. Although deep down this is really about Danske making another reality check on UK economic growth over the coming years. Tim Morgan of Tullett Prebon has previously said that trend growth to 2016 is going to be more like 1.4 per cent, compared to the Office for Budget Responsibilityâs benchmark 2.5 per cent forecast⦠and thatâs what Danske Bank think too: Rather optimistically, the OBR assumes that the UK economy will grow strongly in the coming years. We are sceptical of this buoyant growth outlook and think underlying growth will be weaker, global growth will be slower and the pick-up in employment will be more sluggish. Growth rates above 2.5% three years in a row will in our view be very hard to achieve, if not impossible. We guess that the OBR desperately wanted to close the output gap on the medium-term horizon in its economic model, a common mistake among economists. More realistically, we assume that the economy only will expand modestly in the coming years and that structural growth will average 1.5%. This is actually not a negative scenario and we could easily imagine worse outcomes. The GDP deflator. An often overlooked assumption in economic forecasting is about the GDP deflator, i.e. the measure of the level of prices of all new, domestically produced, final goods and services. If the GDP deflator is projected to be high in the coming years, it has the positive side effect that nominal output will rise faster than a potential public deficit and the debt burden will therefore decline. The UK GDP deflator has averaged 2.5% over the past 20 years, but the OBR projects that it will be even higher in the coming years, keeping the debt burden in check. In comparison, the US GDP has averaged 2.1% over the past 20 years, Eurozone 1.8% and Japan -1%. Rest of the story: http://ftalphaville.ft.com/blog/2011/09/08/672356/why-is-britain-still-aaa/
The UK, for better or worse, can print its own money unlike the eurozone countries. Also, it has never ever defaulted on it's debt. Nevertheless, it doesn't deserve a triple A rating.
Printing your own currency/banknotes is the solution http://www.bbc.co.uk/news/world-asia-pacific-14774526