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Moody's Says UK Emergency Budget Supportive Of AAA Rating, Sends GBP, EUR Higher
Even as CDS spreads continue surging on solvency threats, FX markets seems comforted by the latest batch of drivel out of Moody's, which earlier reported that UK emergency budget is supportive of the country's AAA rating. GBP spikes immediately following the news, leading to a rise in all EUR pairs as well. Ironically all this is occurring even as a new rumor of an imminent Fitch downgrade of France is making the rounds.
From Moody's
Moody's Investors Service today said that the UK budget is supportive of the country's Aaa rating and stable outlook because it is a key step towards reversing the significant deterioration in the government's financial position that occurred over the past two years. The budget is also broadly in line with expectations, both in terms of the mix of spending cuts and tax increases, and in its more downbeat economic growth projections.
"The budget confirmed the UK government's intention to eliminate the structural current deficit by 2015-16," says Kenneth Orchard, Moody's Vice President - Senior Credit Officer. "Successful implementation would return the government's finances to a more sustainable trend."
The government expects net debt to stabilise at around 70% of GDP in 2013-14 -- a lower level than the rating agency had initially envisaged -- and gradually decline as a percentage of GDP. In Moody's view, this would -- if achieved -- ensure that, in all but the most extreme interest-rate scenarios, the UK's debt affordability would remain consistent with a Aaa rating. Moody's measures debt affordability as government interest payments as a percentage of total revenues.
Moody's also notes that the new Office for Budget Responsibility (OBR) has revised the estimate of the output gap downward by two percentage points of GDP, thereby effectively confirming the sustained damage caused by the crisis to the UK economy and that its structural fiscal deficit is larger than previously estimated.
Moody's also highlights that there are implementation risks associated with the budget. The rapid fiscal consolidation will have a strong negative impact on domestic demand, which is assumed to be offset by robust growth in net exports and a decline in private sector net savings. "Moody's believes these assumptions to be sound," says Mr. Orchard. " But it should be emphasised that, if these assumptions do not hold up, the decline in the deficit may be lower than assumed."
Nevertheless, Moody's says that the budget plan addresses the major concerns surrounding economic growth. Most of the fiscal consolidation will come from lower current spending, which has bolstered long-term economic growth in other countries when they undertook large deficit reductions in the past. The cuts to public sector investment are relatively modest and should therefore not severely impair future GDP growth. The focus on higher consumption taxes (VAT) should also limit the impact on private sector investment.
Moody's also notes that the government's plan incorporates conservative economic growth forecasts, and that lower trend GDP growth -- if it occurred -- would likely be reflected in equally lower growth in current expenditures over time. More details will be made available in the UK government's spending review in October, when detailed multi-year budgets will be set for each government department.
The last rating action on the Aaa/P-1 ratings of the UK government was implemented on 24 May 2006, when Moody's affirmed these ratings with a stable outlook.
The principal methodology used in rating the government of the UK was Moody's Sovereign Bonds Ratings, published in 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
And for those interested, here is a summary review of the UK emergency budgetfrom BofA:
Borrowing £34bn per annum less by 2014/15
As expected, the new government’s emergency Budget set out both significant tax rises and spending cuts over the next few years, driving a notably faster projected fall in Public Sector Net Borrowing (PSNB) over the medium-term than set out by the Office for Budget Responsibility (OBR) last week.
The government now expects PSNB to fall to £37bn (2.1% of GDP) by 2014/15, compared to the OBR’s forecast of £71bn (3.9% GDP) last week. Those additional cuts in PSNB are relatively well spread over the next few years, a littleskewed towards latter years at the margin.
The emergency Budget set out £8bn of additional fiscal tightening measures in 2010/11 (of which £6bn had already been announced), rising to £40bn per annum by 2014/15. But the impact of those measures on PSNB was offset somewhat by a slightly weaker GDP growth outlook: the OBR revised down their 2011 GDP growth forecast by 0.3pps, to 2.3%, though growth in later years was left broadly unchanged at between 2.7% and 2.9%.
The fiscal tightening measures announced in the emergency Budget were only marginally stronger than our expectations: by around £1bn per annum. But as a result of the OBR’s GDP growth forecasts from 2012 onwards remaining higher than we expected, their PSNB forecasts by 2014/15 are around £10bn per annum lower than we anticipated.
In cyclically-adjusted terms, the fiscal tightening measures announced in the emergency Budget are expected to reduce borrowing to 0.8% of GDP by 2014/15 (Figure 9), compared to 2.8% of GDP set out by the OBR last week. That is in line with the new government’s commitment to cut cyclically-adjusted borrowing at a notably faster pace than set out by the previous government.
Public spending is now expected to fall from 47.5% of GDP last year to 40.9% by 2014/15. Over the same period, tax receipts are expected to rise from 36.6% of GDP to 38.8%. So - as per the government’s announced plans beforehand - the vast majority of the 9ppt of GDP fall in PSNB over the next few years is expected to come from spending cuts, rather than tax rises.
Total tax rises announced in the emergency Budget amounted to £6bn to £8bn per annum from 2011/12 through to 2014/15. That was more than accounted for by a 2.5ppt rise in the main VAT rate to 20% from January 2011 onwards (raising around £13.5bn per annum by 2014/15) and a bank levy to be introduced at the same time (raising £2.4bn by 2014/15).
Offsetting around one half of those increases were cuts in the main corporation tax rate by 1ppt per annum from 28% at present to 24% by 2014/15 (costing £2.7bn per annum by 2014/15), a £1000 rise in the personal income tax threshold (costing nearly £4bn per annum in due course) and raising the threshold for employers’ National Insurance Contributions (costing around £3.7bn by 2014/15).
New spending cuts announced in the emergency Budget were expected to accumulate to around £32bn by 2014/15. Not least, there were sizeable cuts to a wide array of tax credits, and housing benefits.
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This is similar to when the Euro jumped to 1.32ish after the Euro Tarp was announced.
Hilarious.
I should of known, Another false alarm. Thanks for interupting my morning Dump!! You owe me a new pair of Fruit of the Looms
That's okay, the US New Home sales data will take care of that Euro run soon, and the markets will fall apart again. Any bets they use the word "unexpectedly drop"? AP is as bad as CNBC releasing irresponsible and poor quality fantasizations.
I think it's more important to talk about the UK tax increases from 18 to 20% on consumer goods and also the antidumping taxes for chinese products of 30 to 50%
Is there any truth to the rumour that Fitch has downgraded France? Just saw that on forexlive...
http://www.forexlive.com/114914/all/eurusd-dumps-on-rumor-frnace-downgraded-by-fitch
UK's estimated debt - £890bn. I doubt it.
Council pensions (£53bn) - http://www.taxpayersalliance.com/Deficits.pdf
Network Rail (£20bn) - http://www.telegraph.co.uk/finance/2934080/Will-Brown-be-derailed-by-Network-Rails-debt.html
PFI debt (2009: £124bn) - http://www.taxpayersalliance.com/waste/2009/06/pfi-millstone---how-heavy-is-it-now.html
Royal Mail pension deficit (£8bn) - http://www.personneltoday.com/articles/2010/05/21/55650/royal-mails-pension-deficit-hits-8bn.html
Unfunded pension liabilities(£1.2tr) - http://www.timesonline.co.uk/tol/money/pensions/article6597719.ece
...and so on and so on.
I prefer to believe this figure from the IEA - £4.8 trillion - http://www.iea.org.uk/record.jsp?type=release&ID=199
The Mood is sunny-side up, but stilled fried.
Moodys Advice is similar to Goldman's... SELL!!! NOW!!!
Deck chairs,Titanic are words that come to mind after seeing the budget,no long term reform of immigration,welfare,sickness benefit,child benefit.
And the band played on........
Ah, 'drivel', a lovely word and SO descriptive...
DavidC
I suspect Moody's is saying that Cameron negotiated a higher service fee for the Bank of England's upcoming role in saving the world. The US sends newly minted dollars to England to be used to purchase US debt that will result in robust growth in exports for the whole world... except Germany.