With everyone trading the GBP in the overnight session eagerly awaiting the leaked Moody's report that the rating agency, which has yet to be at least 2 years behind the curve, is set to downgrade "more than a dozen British financial institutions to reflect the eventual withdrawal of Government support for the banking industry", China has gone and upstaged the beating around the bush poser by downgrading the UK outright from AA- to A+, with a negative outlook. The premise: stagflation and deteriorating "debt repayment capability." Poor fools: they have yet to meet the full debt repayment capability of 20 Primary Dealers.
China's first domestic rating agency, Dagong Global Credit Rating Co. Ltd., on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the United Kingdom by one level to A+ from previous AA- with "negative" outlook.
The Chinese rating agency said the downgrade reflected the UK's deteriorating debt repayment capability.
The GDP growth rate of UK in 2010 was 1.3 percent, lower than average growth rate of the world economy, with budget deficit accounting for 9.8 percent of its GDP. The sluggish growth momentum continued in the first quarter of 2011, Dagong said.
The rating agency said the British government's move to revive its economy would not substantially reverse the trend of increasing the government's fiscal deficit and debt burden in the long term.
Dagong predicted the growth rate of UK economy to be between 1.3 percent and 1.5 percent in the next two years. And its budget deficit would exceed the targeted 7.9 percent to 9 percent.
If history is any indication, just like Dagong was the first to downgrade the US, so its action on the UK will be followed by a round of serious introspection on behalf of the rating agencies, whose purpose in life, now that CDOs are still completely dead, and any corporate bond getting priced at 5% or below no matter if it is AAA or CCC, escapes us.
We will provide you the full report as soon as we have it.