Sunday 21 April 2013

Why did Fitch downgrade the UK?

Whether it really matters much or not (and it might do), this week's downgrade of the UK to AA+ by the ratings agency Fitch has embarrassed Chancellor George Osborne and been pounced upon by Shadow Chancellor Ed Balls. 

If you read the BBC News website's account, Fitch downgrades UK credit rating to AA+, you will (I suspect) come away with a vague sense as to the reason for the downgrade.

The BBC article concentrates on the Plan A v Plan B debate concerning the government's austerity measures, leading the reader to assume that Fitch's beef is with the austerity strategy and the harm it's doing to the economy:
The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic outlook.

The move, after Moody's downgrade in February, came as Chancellor George Osborne defended the government's austerity plan.

Fitch said its downgrade primarily reflected a weaker economic and fiscal outlook.

Mr Osborne has said his was the "right plan" and that the economy was "healing".
Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term.
Reading an article in The Spectator by Fraser Nelson comes as something of a jolt after reading this. Fraser argues that the reason Fitch downgraded us was because our government hasn't lived up to its promises on borrowing and debt reduction i.e. that it hasn't been "austere" enough:
Fitch has today followed Moody’s in downgrading Britain from AAA to AA+. The reason? George Osborne is borrowing far too much.  In its verdict, it said that gross debt “will peak at 101% of GDP in 2015-16…and will only gradually decline from 2017-18.” The Chancellor, of course, had once set a rule to “ensure that debt is falling as a percentage of GDP by 2015″. This has been abandoned, and the downgrades are the consequence.  
For all Labour’s talk of austerity, George Osborne is borrowing more over five years than Labour did over 13 years.
Fitch had been happy with Osborne’s original deficit reduction plan. But the Chancellor has not stuck to it. Faced with a choice between more cuts or more debt, he has gone for more debt every time. 
There was absolutely nothing in the BBC's article to suggest that this was the reason for Fitch's decision.

Indeed, so different was the Spectator's take from the BBC's that I suspected Fraser might have been engaging in a bit of pro-Tory spin. (The online piece by the BBC's Economics Editor Stephanie Flanders similarly avoids giving this particular interpretation.)

If Fraser's version of Fitch's verdict is correct then the BBC has seriously failed to report it accurately; if it isn't correct, then Fraser really is engaging in pro-Tory spin.

There's only one way to find out. 

The BBC rather unhelpfully fails to link to the Fitch statement, thus making it hard for its readers to read what the ratings agency actually said. Fraser Nelson, in contrast, provides the link for his readers. Here it is.

This is what Fitch says are its key rating drivers here:
The downgrade of the UK's sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch's medium-term projections for UK budget deficits and government debt. Despite the loss of its 'AAA' status, the UK's extremely strong credit profile is reflected in its 'AA+' rating and the Stable Outlook.
- Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16 (equivalent to 86% of GDP for public sector net debt, PSND) and will only gradually decline from 2017-18. This compares with Fitch's previous projection for GGGD peaking at 97% and declining from 2016-17 and the 'AAA' median of around 50%.
- Fitch previously commented that failure to stabilise debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the UK's strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a 'AAA' rating.
- Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the UK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis. Fitch has revised down its forecast economic growth in 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% at the time of the last review of the UK's sovereign ratings in September 2012. The UK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.
- Despite significant progress in reducing public sector net borrowing (PSNB from a peak of 11.2% of GDP (GBP159bn) in 2009-10, the budget deficit remains 7.4% of GDP (excluding the effect of the transfer of Royal Mail pensions) and is not expected to fall below 6% of GDP and GBP100bn until the end of the current parliament term. The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions (and/or tax increases) if public debt is to be stabilised and reduced over the medium term.
As you can see, Fraser Nelson's interpretation of Fitch's decision is correct. The ratings agency is primarily criticising George Osborne for failing to tackle the budget deficit and debt, for borrowing too much, for not pursuing Plan A rigorously enough.

The obvious question now arises: Why didn't the BBC article inform us about this?

The curious thing about the BBC article is how little it tells us about what Fitch said. Unlike Fraser Nelson's  piece, it doesn't extensively quote from the Fitch statement; indeed, as far as direct quotes are concerned, it uses a mere nine words (and that's if you include "stable"):
Fitch said its downgrade primarily reflected a weaker economic and fiscal outlook.

Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned its outlook to "stable", removing the threat of further rate action in the near term.
How on earth is that good, informative reporting?

Bluntly put, it isn't. It is uninformative at best and positively misleading at worst. Have many of its readers would google around and find and read the Fitch statement for themselves?

When you turn to the BBC News website (as millions do each day) you expect it to tell you what has happened and to explain it without fear or favour. If a report about a ratings agency's downgrade fails to report what the rating agency actually says and fails to give an explanation of its decision that comes anywhere near to its reality, then (I'm afraid) I find myself questioning its adequacy - and its impartiality. The 'inadequacy' question is, I think, beyond doubt here. The 'lack of impartiality' question more questionable.

How about you? Putting aside your political preferences, what do you make of this failure (if you agree it is a failure) to report a story adequately?

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