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UK credit rating downgrade could have a severe impact

As analysts come to terms with the fact that S&P, the renowned credit rating company, believes that the UK rating could fall below AAA in the short term there are many more issues which could follow. A number of financial newspapers have picked up on the fact that the UK government is involved in a £2.3 billion rescue package for the UK car industry which hinges upon the UK government guaranteeing £1.3 billion of loans from the European Investment Bank (EIB).

However, it is not common knowledge that the EIB does not accept guarantees for more than £200 million from guarantors with a credit rating less than AAA. While opinion is mixed as to whether the UK rating will in fact fall in the short to medium term there are significant implications for a number of rescue packages and industries in the UK. In effect a reduction in the rating of UK debt would see the UK authorities £1.1 billion short on the EIB loan guarantee which would crush the car industry rescue package.

How it would impact upon the ongoing banking rescue programme and quantitative easing program also remains to be seen with government officials crossing their fingers and hoping it will all go away.

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