Ratings agency Standard & Poor's lowered its outlook on Britain to negative on Thursday, citing government debt that would be hard to rein in and political uncertainty about the policy response with an election looming.
The agency affirmed Britain's 'AAA' long-term and 'A-1+' short-term sovereign credit ratings.
"We have revised the outlook on the UK to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of GDP and remain near that level in the medium term," Standard & Poor's credit analyst David Beers said in a statement.
Beers said S&P had a more cautious view than the government of "how quickly the erosion in the government's revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow".
Official data released minutes after the S&P announcement showed British public borrowing hit a record high for the month of April — the first month of the new tax year — as the recession-hit economy battered public finances. [nONS004245]
The June gilt future and the pound tumbled sharply after the S&P announcement.
By 0827 GMT, June gilt futures were down 46 ticks at 119.50, having hit a session low of 119.43.
Fellow ratings agency Moody's declined comment on its plans.
In his April budget, finance minister Alistair Darling said public debt would spiral — with a record 220 billion pounds of debt supply this year — but would decline further out based on assumptions of a return to growth which business chiefs and economists have described as optimistic.
S&P said Britain's ratings were supported by its wealthy, diversified economy, fiscal and monetary policy flexibility and relatively flexible product and labour markets.
But an election due by next year, which opinion polls suggest Prime Minister Gordon Brown's ruling Labour party is likely to lose to the opposition Conservatives, was creating uncertainty about government policy despite support across the parties for fiscal tightening.
"The rating could be lowered if we conclude that, following the election, the next government's fiscal consolidation plans are unlikely to put the UK debt burden on a secure downward trajectory over the medium term," Beers said.
"Conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal outturns are more benign than we currently anticipate."
Analysts said S&P had heaped further pressure on the next government to act to rein in public debt.
"Whoever wins the next election, tax hikes and sharp spending cuts will be the order of the day — but today's announcement by S&P puts that much more pressure on the next government to act quickly," Colin Ellis of Daiwa Securities said.
