The UK's Office for National Statistics has revealed that the UK's economy has contracted more than expected for the last three months until year-end December 31:
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This will no doubt cause some concern of a double-dip recession hitting the UK. It will be especially relevant to see if the UK can hold on to its AAA status because, as Euromoney has reported during the past few months, the jury is still out as to whether it should retain its gold-plated credit rating.
Despite France being downgraded by S&P in January 2011, the decision in December last year by the rating agency to put France on a negative outlook was enough to fuel angry responses from the French government.
The decision precipitated a memorable outburst by Christian Noyer, the governor of the Central Bank of France, who argued that the UK deserved to be downgraded before France due to its weaker economic fundamentals. His comments focused attention on the comparative states of the French and British economies amid the intensification of the crisis in the eurozone.
And, indeed, his comments were not unwarranted. In Euromoney’s Country Risk Survey, France has consistently received higher (ie less risky) scores from economists than the UK across a range of economic and political indicators, suggesting the views of analysts are largely supportive of Noyer’s comments.
At the time, before France was downgraded, Nicholas Spiro, managing director of Spiro Sovereign Strategy, said:
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The latest set of data only emphasises these points.
Furthermore, on Tuesday, the Bank of England governor Mervyn King hinted that the central bank was likely to go through another round of quantitative easing, after official figures from the UK revealed that public sector net debt exceeded £1 trillion for the first time.
In a speech, King said:
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In November, Euromoney explained that if the Bank of England wants to help bring down UK banks’ funding costs, so as to ease credit to the economy, maybe it should start buying UK bank bonds.
Moreover, we also reported that month that a well-regulated banking system has no need for credit easing.
Indeed, UK chancellor George Osborne’s autumn statement at the time begged the question that if he wants to ease credit to UK businesses quickly, he might be better advised to ask why the UK banking system isn’t lending more.
He should look at the picture below, based on UBS estimates, showing the shrinkage of the productive part of Barclays’ balance sheet potentially available to support lending to the UK economy.
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Euromoney also highlighted in November that recapitalization won’t help bank funding.