The ability to obtain credit is governed by a person’s credit rating, a fact that people are becoming increasingly aware of in these difficult times.

And unless one takes the unwise decision to try and lie, credit ratings are difficult to get around. Apply for anything from a mortgage to a mobile phone and the chances of you defaulting on the deal are assessed by lenders and retailers looking at your past record. Any missed payments and your record is likely to be blemished; denying you the best deals, or even a deal itself. And in these straightened times, credit scoring (by which an individual will be scored as to their ability to pay, based on circumstances and past performance) is getting more testing.

So what does it mean when Britain’s sovereign credit rating is under threat? Currently Britain is regarded as the very credit worthy, in other words, deserving of an AAA rating. This is coveted by nations as a sign of their status and resilience. It is a rating enjoyed not just by the U.K., but also the U.S, and many in Western Europe.

Now one of the biggest credit rating agencies, Standard and Poor’s (S&P), is casting a critical eye over the U.K. And S&P have changed their view on the U.K.’s debt outlook from stable, to negative. This reflects the fact that the U.K. government has taken quick and dramatic steps to stop its banking system from collapsing. But what this has done is to effectively take debt away from the struggling private sector and deposit it with the less struggling public sector. Now the public sector is straddled with a mountain of actual debt and a mass of contingencies.

This has caused S&P to worry about the U.K. government’s ability to cope with this burden over the coming years.

So what will actually happen should the U.K. lose it’s star triple A status.

The consequences could be catastrophic and the main worry is a sudden exodus of cash from the country as foreign investors rip out their money and leave for safer climes. And this might almost be an automatic process, as many funds which invest on these shores are only allowed to invest in triple A rated currencies. This is what happened to Japan when it lost its coveted third star .

Now, all might not be lost, because although the U.K. might be on S&P’s watch list, the optimistic can hang onto a few bright spots. Experts have calculated that there is only a near 40% chance of the third A being lost in the next two years. On hearing the news, the markets did a slight wobble, but recovered, showing they did not collapse with the news, and, the pound actually improved. Also, the U.K. is not alone in possibly losing its third A, with some European nations and the U.S. suffering the same fate in the medium term.
Indeed, the state of the world economy is such that there might not be many triple A states left over the coming years, so the U.K. will be in very good company.

Finally, others are pointing out that S&P and other agencies like it, are currently suffering a major credibility problem, after it was they that gave triple A investment status to many of the U.S. mortgages which turned out to be toxic loans.

So, what do they know?

Guest Article by Neil Camp