Question

On 27 March 2020, the Fitch credit rating agency downgraded UK sovereign credit rating to AA- with a ‘negative’ outlook. What are the potential effects of this downgrade on the UK yield curve and GDP? Explain your answer.

Answer 1

                                    With the borrowing levels set to rise and the negative outlook possibility for Britain’s sovereign debt score, Fitch has downgraded the UK’s sovereign credit rating to AA- score. With the shutdown measures being implemented in UK as a response to the Covid-19 crisis, the economy has been affected on a large scale. The downgrade reflects a significant weakening of UK’s public finances and a fiscal loosening that was introduced before the scale of crisis became apparent. According to Fitch, the corona virus shutdown was likely to shrink the economy of Britain by about 4% in 2020.

The following are the likely impacts of this downgrading on the yield curve and GDP of the economy of UK

· The public debt as a share of GDP is expected to rise with the downgrading of the economy.

· The higher rated corporate issuers within the country is more likely to get downgraded

· The net debt issuance is likely to be affected on a large scale

· The investor confidence in the economy is likely to get decreased as a result of the downgrading and it is likely to have a huge impact on the GDP of the nation

· The yield curve gives an idea of the future interest rate changes and the economic activity. With the downgrading, the interest rate is also going to be varied as there is an imminent danger of the economy being downgraded.

· The capital structure decisions within the corporate issuers is more likely to be downgraded which could lead to lower GDP levels of the economy

· The value of the domestic currency could get affected on a large scale and it is going to have a likely impact on the foreign exchanges which could reduce the slope of the yield curve.