Cayman stable at AA3
The United Kingdom’s Chancellor of the Exchequer has said that he will not change policy despite an agency’s decision last week to downgrade Britain’s credit rating.
George Osborne spurned renewed calls from Labour Party opponents for more stimulus for a flat-lining economy declaring that the action by Moody’s Investors Service “redoubled his commitment” to the government’s policy of cutting spending in an effort to reduce deficits.
Labour Party spokesman Ed Balls said Saturday that the government should increase borrowing to give immediate stimulus to the economy.
The credit rating downgrade – one notch from the top-rated AAA to AA1 on Friday – was likely to have little practical effect on Britain’s borrowing costs, with other large western nations, including the United States, already having faced similar downgrades.
However, Moody’s said sluggish growth and rising debt were weakening the British economy’s medium-term outlook, a statement that could lead to political problems for Mr. Osborne and the UK’s coalition government.
Two other major rating agencies — Fitch and Standard & Poor’s — have Britain still at AAA but on “negative watch”.
Public sector borrowing in the UK remains stubbornly high and is forecast by the government’s Office for Budget Responsibility to be around 120 billion pounds (US$182 billion) for the year ending in April; little changed from the previous year.
The UK economy stagnated in 2012, with just one quarter of growth.
Mr. Osborne said the downgrade was “a stark reminder of the debt problems facing our country,” with a debt accumulated over the years and made worse by Europe’s economic crisis.
“We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs,” Osborne said.
Balls charged that Osborne was incapable of admitting a mistake.
“The plan has not worked,” Balls said.
“I think [UK] prime minister (David Cameron) is going to have to ask himself, ‘how do I get change in our economic policy for the good of the nation?’” Balls added.
Cayman’s debt rating
The Cayman Islands avoided a credit rating downgrade from Moody’s last month, but overall its debt outlook was not quite as strong as other larger western nations.
Moody’s affirmed its AA3 sovereign rating for the Cayman Islands. The rating outlook remains “stable” as recent actions by the Cayman Islands government “have reduced the fiscal deficit and appear likely to lead to a fall of the main debt metrics”, Moody’s said in its credit analysis.
In December 2011, Moody’s released a credit analysis which noted that a negative outlook or other downward rating was the second most likely scenario, following a stable outlook, due to Cayman’s rapidly rising debt burden between 2007 and 2011.
“Since then debt to [gross domestic product] appears to have peaked at 25 per cent of GDP, reducing the risk of a downwards ratings action. But downwards credit pressure can still result if the government’s efforts to limit the increase in the debt ratios fail, either due to policy reasons, a slower economic recovery or both,” Moody’s said in its report.
In addition to the debt metrics, the stable outlook for Cayman’s credit rating is based on the islands’ high levels of economic development which balances a potential risk resulting from the debt burden, according to the rating agency.
A peer comparison showed Cayman trailing only Bermuda, which has a AA2 credit rating, as a result of its higher wealth in terms of per capita GDP at similar debt burdens and growth perspectives. Cayman’s Caribbean neighbours are typically less wealthy and have higher debt burdens translating into significantly lower credit ratings.