S&P Global Has A Warning For UK Debt Investors

S&P Global Has A Warning For UK Debt Investors
Paul Allison, CFA

over 1 year ago2 mins

What happened?

There’s a long line of haters waiting to kick the new UK government while it’s down, which might not come as a huge surprise: the country’s debt is now verging on 100% of its economy, and debt rating agency S&P Global (S&P) freshly placed UK government borrowing on “negative outlook” – basically a big red flashing warning signal – late last week.

Agencies like S&P give their verdicts on whether companies and governments are good for their debts, but they sure lost a lot of credibility in the wake of the global financial crisis. For good reason, too: they assured investors that firms like AIG and Lehman Brothers were “golden” back then, only for them to collapse or be bailed out by the taxpayer. So you’d be forgiven, then, for brushing S&P’s latest hot take off without much thought – but it might actually be worth looking into….

What does this mean for markets?

Being placed on negative watch is only a warning shot across the bows, of course, and it's unlikely that the UK will actually lose its top-notch AA rating from S&P any time soon. Thing is, even a whiff of a possible downgrade won't help the rapidly U-turning government in its quest to build credibility, one thing it desperately needs if it wants to keep interest costs under control.

Government debt investors pay close attention to what rating agencies say, but their verdicts matter for the corporate market too. See, a company’s debt rating – and the amount of interest it pays to borrow – tends to be based on its home government’s rating, with a little bit added on for other specific risks. So when the cost of borrowing – which isn’t helped by the S&P’s negative outlook – for the UK government goes up, it has ripple effects for a whole host of British companies that also rely on debt financing.

So don’t be fooled: when a debt agency says “we’re watching you”, it still matters – despite any shaky judgments they’ve made in the past. The UK government, then, will be working overtime trying to reassure lenders while hoping that S&P’s negative outlook doesn’t materialize into something more nasty, like an actual downgrade.

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