SPEAKERS:

DM:Dermot Murnaghan

DR:David Riley

DM:He has taken a bit of a knocking lately the IMF says he should rethink aspects of the pace of austerity. Some leading economists say it’s time for a plan B and now another ratings agency the second Fitch has stripped the UK of its triple A status. So I am joined now by the managing director of Fitch Ratings, David Riley. A very good morning to you Mr Riley, and I mean obviously, a lot of discussion already in terms of that ratings downgrade but are you effectively saying here that the UK’s problems are to some extent self induced, that the deficit reduction strategy has affected growth which has therefore affected the deficit reduction strategy.

DR:Well there’s no doubt that there’s a trade off at least in the short term between austerity and economic growth but I think it’s important to remember that the UK went into the crisis with a very large budget deficit, still does have a very large budget deficit and we now think that UK national debt is going to exceed one hundred percent of national income. It’s going to stay higher for longer and of course part of the reason for that is as you say it’s because economic recovery has been very weak, almost non-existent. In fact we don’t the UK is going to get back to its sort of pre-crisis level in 2007 until 2014 but it’s not just about the austerity, I mean the bottom line is the private sector borrowed too much in the UK, it’s been very hard to rebalance the UK economy, the UK produces and sells things to the wrong places if you like. We’re not selling goods to fast growing economies in Asia, such as China, we’re selling financial services to Europe. So the… it’s quite complex story I think in terms of why the economy has been so weak.

DM:But I mean could supporters of the Chancellor and the Chancellor himself, be forgiven for thinking, well look I’m damned if I do and damned if I don’t. If a year, two years ago, or even when they came into power they said they weren’t going to cut the deficit so quickly, ratings agencies like yours would have said my goodness me, you’ve got to attack that debt, you’ve got to attack the deficit.

DR:I think you’re right, I think the Chancellor is caught between a rock and hard place. What I would say and this kind of ties a little bit with what the IMF have been saying recently is, if you look at the pace, the severity of the austerity it was actually quite stringent in the first two years of this Parliament but actually the government has slowed that down quite significantly. It’s abandoned the target of reducing debt by the end of this Parliamentary term and in fact now we’re predicting that much of the deficit reduction through tax and spending measures is going to have to come through for the next Parliament. So there is a reasonable debate to be had about how fast and harsh is the austerity but it needs to happen.

DM:I know you take a dispassionate view of things and you don’t advise…

DR:Yeah.

DM:…on policy but nevertheless if the UK suddenly said, we’ll we are going to borrow a bit more to try and spark growth, what would the ratings agencies’ attitude be to that?

DR:Yeah.

DM:Wouldn’t alarm bells go off?

DR:If, if there was a change of strategy such that the... basically the UK was to say, we’re not going to try and cut this deficit over the next three, four years, we’re going to allow the national debt to continue to rise potentially indefinitely, then that would put a lot of pressure I think on the rating of, you know it’s likely that the rating would fall in that context. And I think more importantly if you like is the way that the international investors would start looking at the UK and whether there might be some concerns that might emerge from that. How, obviously the balance, the speed, the balance between tax and spending, those are things for the government of the day to… to decide.

DM:Can I ask you a question about the ratings agencies, your own and indeed others, I mean do you think your credibility has taken quite a knock because of course investors pay money for your advice yet as we all know, you know leading up to 2008, I’m not sure if you had given it, but Lehman Brothers had a triple A rating. It went under, you’ve downgraded the United States, you’ve downgraded France and investors don’t seem to bat an eye even when it comes to the UK?

DR:Well it’s only true that rating agencies had had their reputation damaged in the run up to the financial crisis but actually you know, if you look at the long history, Fitch has been around since 1913, our track record actually is pretty good as an indicator of relative credit quality. And particularly in terms of our ratings of national governments which we’ve been doing for more than a hundred countries over more than two decades. I think what is happening is, as you say, is that we’ve seen France, we’ve seen the United States as well the as the UK lose its triple AA rating and so what’s happening is that it’s been a sort of ugly contest, we still think actually the UK is a very safe credit and it’s still a relative safe haven when we compare it to the Euro zone.

DM:Okay Mr Riley, must end it there, thank you very much indeed.

DR:Thank you.

DM:David Riley there, Managing Direct of Fitch Ratings on the disappearance of the UK’s triple A rating in their book.

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