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Government Plans To Cut The Deficit 'distinctly Weak', Says Fitch Ratings Agency

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http://www.telegraph.co.uk/finance/financetopics/budget/7810709/Government-plans-to-cut-the-deficit-distinctly-weak-says-Fitch-ratings-agency.html

In a blow to George Osborne, the ratings agency Fitch said there was a real danger the Coalition would not do enough over the medium term to sufficiently reduce the £156bn deficit.

Giving a clear signal that it wants to see a detailed plan for deeper cuts in the emergency Budget on June 22, Fitch said: “While likely, it is not completely obvious from policy statements that the new government will adopt lower deficit forecasts throughout the medium term.”

The Chancellor has repeatedly stated that protection of the country’s prestigious top tier credit rating was one of his main priorities. Before the election, ratings agencies warned on several occasions that Britain could be downgraded if bold enough action was not taken on the deficit once the new Government was in place.

Fitch warned on Tuesday that if, as expected, the new Office for Budget Responsibility downgraded the Treasury’s current economic growth forecasts, the Coalition’s current plans to cut the deficit would have even less of an impact.

“A clear agenda exists for tax cuts in a number of areas and it is possible that the new Office for Budget Responsibility will deliver a more pessimistic assessment of the economic outlook which offsets stronger discretionary tightening,” Fitch said.

The ratings agency said Britain was also likely to fall behind its European neighbours if plans for medium term consolidation remained as they were.

“With other European sovereigns strengthening their fiscal consolidation plans and market concerns about sovereign risk in advanced countries increasing, both the size of the UK deficit currently projected for 2011 and the failure to reduce it to 3pc of GDP within five years are striking.”

The deficit in 2010 is expected to be more than 11pc of GDP - the largest in Europe according to European Commission forecasts.

Can't see the happy clappy feeling last much longer, GDP is surely heading for a big contraction once the cuts are announced? The private sector can't make it up can it? Has the recovery been locked in?

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http://uk.reuters.com/article/idUKTRE6571PA20100608

DEEPER CUTS NEEDED

Fitch recommended that UK government borrowing should be 1 percent lower than projected in the March budget throughout the medium term. Those forecasts envisaged a reduction in the budget deficit to 8.5 percent in 2011/12, falling to 5.2 percent of GDP by 2013/14.

The extra cuts would help restore "fiscal space," or a cushion against further economic shocks, Fitch said, but it seemed to suggest this may not be attainable only by cutting spending.

"Achieving such a path purely on the basis of further spending cuts would imply unprecedented real declines in primary spending," it noted.

The government said it agreed that more needed to be done to tackle borrowing.

"Fitch's report makes the case clearly for an acceleration of deficit reduction, particularly in light of events in the euro area sovereign debt market in recent months," a Treasury spokesman said.

The new administration has said it aims to achieve a significant reduction in the structural deficit over the course of a five-year parliamentary term with 80 percent of the reduction being achieved by spending cuts and 20 percent by tax hikes.

That compares with the previous Labour government's plans for two-thirds spending cuts and one-third of tax measures.

But the government has also slammed Labour's growth forecasts for the coming years as overly optimistic and they are likely to be revised down at the budget, which is likely to mean the deficit will be higher.

Fitch noted that plans to reduce the tax burden on businesses would also have an impact.

Moreover, it was not clear whether the government aimed to start cutting the structural deficit earlier or whether it was aiming for a bigger adjustment over the medium term.

"The net result of this could be a broadly similar medium-term path for the actual deficit, albeit one that could be more credible," Fitch said.

"Nevertheless ... it would be surprising if the medium-term deficit path was not revised downward."

It's going to be savage.

Still if Gordon Brown has been voted back in this recovery would have been locked....

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Yes, but i think they heard a lot chat, not seen ANY wage cuts like else where............."Ozzy" better cut public pay by 5% VERY soon. Frankly the British public will kick off, & then ...........the £ will crash & Burn.............then watch Petrol/rates rocket (Rubs hands with glee)

Mike

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Are these the same Ratings Agencies who only a few years ago failed to spot the property bubble and rated junk securities as AAA?

Who's rating the rating's agencies?

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Are these the same Ratings Agencies who only a few years ago failed to spot the property bubble and rated junk securities as AAA?

Who's rating the rating's agencies?

Pure speculation but I wonder if the big fat fees have dried up from the banks and now suddenly the rating agencies have bung free glasses on and suddenly they see turds everywhere?

Or maybe they've hired some better quality staff who have no connections with the banking community?

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Actually, despite having mooted £6bn of cuts, the Daily Mail seems to think cuts of £60bn are on the cards. That's still far too little, but it's getting into the right ball-park. Link

Osborne unveils plan to slash deficit as Britain is told to cut faster or risk AAA credit rating

By Daily Mail Reporter

Last updated at 4:01 PM on 8th June 2010

* Fitch: UK needs more ambitious deficit-cutting plans

* Welfare, tax credits and pensions on chopping block

* Public to be consulted about public spending choices

* Ministers to confront star chamber to justify budgets

* £60bn could be slashed from annual expenditure

Chancellor George Osborne

Axeman: Chancellor George Osborne arrives at No10 today ahead of his Commons statement about the government's spending review

Sterling fell to new lows against the dollar and the euro today after ratings agency Fitch said that Britain needed a more ambitious plan to reduce the deficit and warned of a 'formidable' challenge to repair battered public finances.

It said the UK needs to speed up cutting the budget deficit - currently running at 11 per cent of GDP - and claimed the previous government's plans were starting to look weak compared with austerity measures announced by Spain, Portugal and Italy.

The huge size of the deficit projected for 2011 - currently forecast at £163 billion in April's Budget - was 'striking' in contrast with the increased belt-tightening efforts of other European nations, it said.

The agency warned that Britain’s prized AAA rating could be at risk unless action was taken, adding that the scale of the fiscal challenge facing Chancellor George Osborne warranted a faster pace of deficit reduction than set out in the April 2010 Budget.

Sterling fell more than half a cent against the dollar today, hitting a session low of $1.4382, while the euro hit a high for the day of 82.91 pence.

The FTSE 100 index dropped to a low of 4990.60 before rallying to 4996.34, still down 1.4 per cent.

The warning comes as Mr Osborne prepares to call on the public to identify which services should be cut as part of a 'once-in-a-generation' spending review.

He is expected to tell MPs that the report confirmed his warnings that the AAA status was in danger, threatening higher interest rates for firms and homeowners, unless tough action was taken to reassure the markets.

The Chancellor was also expected to tell MPs that the review would include comprehensive examination of targeted areas such as the £200 billion bill for welfare support, tax credits and the affordability of public service pensions.

Using Canada’s success in reining in an eye-watering budget deficit in the 1990s as a template, Mr Osborne and his Liberal Democrat Chief Secretary Danny Alexander will slash as much as £60billion from annual expenditure.

The framework for the 'painful' spending cuts will include a 'star chamber' of ministerial and civil service heavyweights before which departmental ministers will be required to justify their budgets.

Ministers could be asked to consider whether services currently provided by their departments could be better supplied by the private or voluntary sectors.

A Treasury official said: 'Anyone who thinks the spending review is just about saving money is missing the point. This is a once-in-a-generation opportunity to transform the way that government works.'

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Are these the same Ratings Agencies who only a few years ago failed to spot the property bubble and rated junk securities as AAA?

Who's rating the rating's agencies?

Given the fact that we haven't had a budget yet, how the hell can they make a judgement. Indeed, the articles I read talked about the April 2010 budget being the problem. A bit silly to be honest.

Ratings agencies were/are useless on Banking risks (although it should be noted some banks (Icelandic ones) were so bad that they didn't apply to get ratings) but pretty spot on on Sovereign ratings. Countries don't pay to be rated, see..

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The take on this from some city chap on CNBC was that it was a comment on the 2010 budget and it is Fitch making public what figures they want to see so that they leave the UK rating as AAA.

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Bill Gross has it right re the rating agencies

In all of the hullabaloo over Goldman Sachs, a CQ analysis of the rating services – Moody’s, Standard & Poor’s and Fitch – has escaped front-page headlines. Not that a number of observers haven’t been on to them for a few years now, including yours truly. Back in July of 2007 some of you will remember my description of their role in the subprime crisis. “Many of these good-looking girls are not high-class assets worth 100 cents on the dollar. You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels and a ‘tramp stamp.’” Now, it seems, I was a little long on humor and a little short on the reality. Tramp stamp and hooker heels do not begin to describe the sordid, nonsensical role that the rating services performed in perpetrating and perpetuating the subprime craze, as well as reflecting the general deterioration of investment common sense during the past several decades. Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors. The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don’t go bankrupt. Their quantitative models appeared to have a Mensa-like IQ of at least 160, but their common sense rating was closer to 60, resembling an idiot savant with a full command of the mathematics, but no idea of how to apply them.
But I come not to bury the rating services, but to dismiss them. To tell the truth, they can’t really die – they serve a necessary and even productive purpose when properly managed and more tightly regulated. A certain portion of the investment world will always need them to “justify” the quality of their portfolios. Governments and regulatory bodies say so – it’s the law. In 1975 the SEC officially designated the aforementioned three rating agencies as “Nationally Recognized Statistical Ratings Organizations.” For all intents and purposes, that meant that regulated financial intermediaries such as banks, insurance companies and importantly pension funds would be guided by the sanctity of their ratings.

Such services, however, while necessary in the ongoing scheme of financial regulation, are overpriced as well as subject to the influence of the issuer, which in turn muddles their minds and clouds their judgment to say the least. E-mails from S&P employees have been cited discussing massaging subprime statistics in order to preserve S&P’s market share relative to their two competitors. PIMCO’s Paul McCulley said it as only he can – “[The breakdown of our financial system] was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out the fake IDs!”

Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!

Nothing to add.

http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Lovin+Spoonful+-+May+2010+IO.htm

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IMPO many of these feckers will only be happy when they are sipping champagne and eating veal in Docklands whilst the rest of us are hungry and in rags.

I would have had the lot lynched personally but there you go.

Unbridled Capitalism is evil.

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Who exactly is it that this country would be paying 70 billion Pounds in interest to by 2015?

Are they identifiable?

Can we nuke 'em with the old Trident gizmos?

Why is it all so freakin' complicated?

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IMPO many of these feckers will only be happy when they are sipping champagne and eating veal in Docklands whilst the rest of us are hungry and in rags.

I would have had the lot lynched personally but there you go.

Unbridled Capitalism is evil.

If we had Capitalism, these feckers would be the ones down the docks looking for work, not eating veal at Docklands. They would have lost everything a long long time ago, under capitalism. Crony Corporatism on the other hand, keeps them in veal.

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Who exactly is it that this country would be paying 70 billion Pounds in interest to by 2015?

Are they identifiable?

Can we nuke 'em with the old Trident gizmos?

Why is it all so freakin' complicated?

A nuclear default, I wonder how the markets would react to that?

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  • 145 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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