Fitch Says US and UK Need to Cut Budget Deficits by 6-7 percentage points of GDP to Bolster AAA Ratings
Fitch Ratings suggests that the US and the UK need to cut their primary budget deficits by 6-7 percentage points of GDP to be sure of maintaining their AAA sovereign debt ratings.
In a presentation to the recent HSBC AAA Issuer and Investor Summit, Fitch says that the most effective manner to minimize “confidence shocks” and the risk of financing distress is for governments to recognize the size of the fiscal challenge and set out and implement credible plans to place public finances on a sustainable path.
The horizontal axis shows the change in the primary (ie. non-interest) budget balance as a percentage of GDP that will be necessary to stabilise debt at its 2011 levels — shown on the vertical axis — given current official fiscal projections.
It is evident that several governments face significant budgetary adjustment in the order of 4pp-7pp of GDP just to stabilize the public debt ratio at the elevated levels projected for end-2011.
“In Fitch’s opinion, the credibility of fiscal consolidation plans would be greatly strengthened by commitment to save positive fiscal surprises, contingency measures in the event of negative fiscal surprises as well as explicit debt and deficit reduction targets. It is also important that sufficient detail and transparency on the key revenue and spending measures is provided so that independent commentators can subject such plans to analysis and investors can track implementation.”
The full presentation is available in AAA Sovereigns Under Pressure (Premium)
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