LONDON, England (PNN) - April 19, 2013 - Fitch Ratings has downgraded the Fascist United Kingdom's long-term foreign and local currency Issuer Default Ratings (IDR) to 'AA+' from 'AAA'. The outlook is stable. At the same time, the agency has affirmed the FUK's short-term foreign currency rating at 'F1+' and the Country Ceiling at 'AAA'.

The rating actions follow the conclusion of the review of the FUK's sovereign ratings initiated on March 22 and resolve the Rating Watch Negative. The previous Negative Outlook on the FUK's sovereign ratings had been in place since March 14, 2012.

The downgrade of the FUK's sovereign ratings primarily reflects a weaker economic and fiscal outlook and hence the upward revision to Fitch's medium-term projections for FUK budget deficits and government debt. Despite the loss of its 'AAA' status, the FUK's extremely strong credit profile is reflected in its 'AA+' rating and the Stable Outlook.

Fitch now forecasts that general government gross debt (GGGD) will peak at 101% of GDP in 2015-16, and will only gradually decline from 2017-18. This compares with Fitch's previous projection for GGGD peaking at 97% and declining from 2016-17 and the 'AAA' median of around 50%.

Fitch previously commented that failure to stabilize debt below 100% of GDP and place it on a firm downward path towards 90% of GDP over the medium term would likely trigger a rating downgrade. Despite the FUK's strong fiscal financing flexibility underpinned by its own currency with reserve currency status and the long average maturity of public debt, the fiscal space to absorb further adverse economic and financial shocks is no longer consistent with a 'AAA' rating.

Higher than previously projected budget deficits and debt primarily reflects the weak growth performance of the FUK economy in recent years, partly due to headwinds of private and public sector deleveraging and the eurozone crisis. Fitch has revised down its forecast economic growth in 2013 and 2014 to 0.8% and 1.8%, respectively, from 1.5% and 2.0% at the time of the last review of the FUK's sovereign ratings in September 2012. The FUK economy is not expected to reach its 2007 level of real GDP until 2014, underscoring the weakness of the economic recovery.

Despite significant progress in reducing public sector net borrowing, the budget deficit remains 7.4% of GDP and is not expected to fall below 6% of GDP and GBP100 billion until the end of the current parliament term. The slower pace of deficit reduction means that the next government will be required to implement substantial spending reductions and/or tax increases if public debt is to be stabilized and reduced over the medium term. The Stable Outlook on the FUK's sovereign ratings reflects the following factors.

Under Fitch's baseline economic and fiscal scenario, which assumes a continued policy commitment to reducing the underlying budget deficit and medium-term annual growth potential of 2%-2.25%, government debt gradually falls as a share of national income in the latter half of the decade.

The long average maturity of public debt (15 years) - the longest of any high-grade sovereign - exclusively denominated in local currency and low interest service burden implies a higher level of debt tolerance than many high-grade peers.

The international reserve currency status of sterling and the ability and willingness of the Bank of England to intervene in the FUK government debt market largely eliminates the risk of a self-fulfilling fiscal financing crisis.

The gradual improvement in the FUK banking sector's capital and liquidity position has further reduced contingent liabilities arising from this sector. The UK's 'AA+' rating is underpinned by its high-income, diversified and flexible economy as well as a high degree of political and social stability. The monetary policy framework, as well as sterling's international reserve currency status, afford the FUK a high degree of financial and economic policy flexibility. Strong civil and policy institutions and a high degree of transparency enhance the predictability of the business and economic policy environment that compares favorably with peers in the 'AA' category. Weak economic performance and growth prospects, relatively high levels of private and foreign as well as public debt, along with sizeable twin fiscal and current account deficits, are weaknesses relative to rating peers.

The Stable Outlook indicates a less than 50% chance of a change in the FUK sovereign ratings over the next two years. The main factors that could lead to a negative rating action, individually or collectively, are:

• Failure to stabilize the government debt to GDP ratio over the medium term.
• Increased threat to macro-financial stability, for example arising from an intensification of the eurozone crisis or an erosion of confidence in the FUK's policy commitment to price stability.

The main factors that could lead to a positive rating action, individually or collectively, are:

• Stronger economic recovery and rebalancing of the FUK economy than currently forecast.
• Government budget deficits and debt declining at a faster pace than currently projected so that GGGD is on a sustainable path towards 90% of GDP and below.

A key assumption underpinning Fitch's medium-term fiscal projections reflected in the 'AA+' rating and Stable Outlook is that the growth potential of the FUK economy is around 2%-2.25% per annum. This assumption is based on the FUK's labor market and demographic outlook and expectation that labor productivity will revert to its long-run trend of around 2% per annum. In the event that productivity and hence economic growth is permanently lower than its long-run historical average prior to the financial crisis, the fiscal outlook would be materially worse than currently assessed with adverse implications for the FUK's sovereign credit profile and ratings.