"Judge us on whether we are able to protect our credit rating," said George Osborne in 2009. If Britain lost that, he warned, it faced a sell-off of British debt in international markets. That would imply higher long-term interest and mortgage rates as bond yields rose (and their prices fell) and a damaged economy.
Today, we're still among a small group of economies with a triple-A, or top-notch, credit rating. But with credit-rating agency Fitch set to review it next year, our triple A is "toast", says Jeremy Warner in The Daily Telegraph. "The real miracle is that we've managed to hang on to it at all."
Does it matter?
But does losing the rating really matter? Politically, yes, if only because Osborne set such store by it. But otherwise? Credit-ratings agencies lost credibility by giving top ratings to complicated subprime loans during the credit bubble. Today, instead of warning investors of trouble, they are lagging indicators. France and America have lost their triple-As, yet their borrowing costs have stayed low.
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This is partly because of implied, or actual, central bank action. Quantitative easing in America and the European Central Bank's promise to buy unlimited quantities of indebted states' bonds have propped up prices, just as the Bank of England's money printing has here. Note too that there are fewer and fewer triple-A rated countries with big, liquid bond markets around, and investors "have to put their money somewhere", as David Tinsley of BNP Paribas puts it.
So these days the loss of a top credit rating doesn't always trigger the loss of credibility that would cause a debt sell-off and higher interest rates. Unfortunately, we could see both. After two and a half years of this government, "we're no nearer getting on top of Britain's debts, or even its deficit", says Warner.
For a second successive year, "the ambition of balanced budgets has been pushed a further 12 months" into the future. That means "billions more of yet unspecified spending cuts and tax increases" in the first years of the next parliament. Public debt will not be falling by 2015-2016, as originally hoped.
Can Britain grow again?
Osborne's programme is in tatters because growth has disappointed: since mid-2010, the economy has grown by just 0.9%, compared to an original forecast of 5.7%. Forecasts for beyond next year still look optimistic, as we pointed out last week.
"Prospects for the economy are key," says Simon Ward of Henderson Global Investors. "A credit-rating downgrade in isolation is going to have a minimal impact, but a downgrade and a triple-dip recession could generate a crisis."
Assuming a likely triple-dip recession doesn't trigger a bond collapse, the longer-term growth outlook is hardly encouraging. The worry is that "the economy is turning Japanese", says Simon Nixon in The Wall Street Journal: "weighed down by so much bad debt [that it can't move] forward". One in ten firms can't service their debt pile, merely the interest on it. That points to many companies "being kept on life support by a banking system unwilling to recognise losses and under political pressure to maintain corporate lending".
Debt-soaked firms and consumers can't consume or invest much. Osborne reckons our apparent "zombie" economy is a cyclical, not a structural problem, says Nixon. He rejected a Bank of England proposal to recapitalise the banks.
The danger here is that in a few years Europe, which, unlike us, is radically slimming down and becoming more competitive, and the US, which is growing, will look a great deal better than a still-bloated and barely growing UK. With Britain then the sick man of Europe, and everyone else getting better, our credibility would be in tatters and investors could ditch our bonds. Without better economic growth, says Mike Ingram of BGC Partners, "the taper is alight and slowly edging towards the gunpowder".
