Analysts Warn U.K. Government Can Kiss AAA Rating Goodbye

(eToro Blog) The U.K. is in jeopardy of losing its sterling AAA debt rating says director of U.K.-based Strategy Economics and that warning reaffirms credit ratings agency Fitch’s own. Last month Fitch analysts cautioned that a deviation from the government’s deficit reduction plan could result in the loss of the U.K. credit rating.

The U.K. economy is in the midst of a double dip recession, in spite of the highly criticized and despised austerity measures, which the current government continues to champion. Many critics, including the U.S. Treasury Secretary, fear that the U.K. government’s stance of eschewing growth in favor of austerity could doom the U.K. economy.

But many are questioning the efficacy of the U.K. government’s austerity plan and don’t believe that it goes deep enough, or at least not as deep as promised. One analyst believes that the U.K. government’s efforts are failing because they haven’t in fact delivered the tougher spending cuts that were promised by the U.K. finance minister. There is a growing concern among policy watchers that the government will maintain the status quo of inertia in the hopes that it will sufficiently appease debt markets and the U.K. public at large. However, critics believe that their strategy is becoming transparent and a more significant effort will need to be forthcoming to stave off a sovereign debt crisis of mammoth proportion.

According to analysts from Morgan Stanley, who lowered growth forecasts for next year, Britain’s estimated budget shortfall for the 2013-2014 fiscal year is on track to record the highest deficit in Europe surpassing even Greece’s. Recently, the Office for Budget Responsibility (OBR) in the U.K. offered its own version of the budget outlook, which was substantially better than Morgan Stanley’s; still, Morgan Stanley’s analysts expect that the OBR will be revising December’s forecast.

The GBP/USD pair is currently trading at 1.6248, while sentiment on OpenBook is predominantly bearish with 87% of traders selling against 13% buying. Over the past six months OpenBook guru UKTrader from the U.K. has had a 25.1% allocation in the pair in his well-diversified portfolio which earned 3.5% over the period; since then, the trader has reduced that allocation to 16.8% over the past month, with a gain of 1.9%. The guru has a pair of recently opened long positions which are currently showing a gain of 6.00% and 8.50%, with TPs of 1.6321 and 1.6311, respectively. As of this writing, the guru has 2,530 followers and 121 copiers.

In a co-managed account under user name santoshtiwari the GBP/USD pair has a significantly higher allocation at 74.5% at 6-months (with a 5.6% gain) was increased within the past month to 96.3% for a 3.1% gain. Realized equity for the corresponding period was 14.8%, improving to 36.1% in the quarter and 87.5% for the past year. Guru account santoshtiwari has 23,068 followers and 3,486 copiers, among the highest on OpenBook.

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