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Raters placed on negative watch

Markets must soon learn not to react to agency sabre-rattling.

Oh the irony of markets moving on a ratings action from Standard & Poor’s on the UK. Surely a lesson to be learnt from the credit crunch is that relying on ratings agencies for investment decisions is not the wisest course. Sterling fell, gilt yields rose and the sovereign CDS widened all as a result of S&P placing the UK’s triple A rating on negative.

This decision came on the back of no fresh information. The UK budget was presented in March, at which time it was clear that the deficit would grow rapidly in the coming years. Both Moody’s and Fitch have since affirmed the AAA rating, citing factors that put them at odds with S&P.

The puzzle of what took the agency so long to make this decision is compounded by its then saying it would not change the rating prior to the next UK general election (no later than June 2010). S&P’s assumptions and forecasts on the state of the UK’s finances are far more pessimistic than the consensus. Only the most apocalyptic strategist thinks that UK debt to GDP is going to hit 100% by 2013 – which is S&P’s fear.

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