Credit rating agency rejects warning that Britain would be plunged into financial crisis if election result is inconclusive

By Nigel Morris, Colin Brown and Sean O'Grady

Fears of an economic meltdown in the case of a hung parliament have been dismissed by a leading credit rating agency and senior economists.

Analysis by The Independent suggests that of the 16 countries worldwide who currently have the top triple-A financial stability rating, 10 are run by coalition governments. The majority of nations that have taken the toughest action in recent decades to tackle their debts were also governed at the time by coalitions.

David Cameron and George Osborne, the shadow Chancellor, have warned that a hung parliament would spark a sterling crisis and the intervention of the International Monetary Fund, which is helping to bail out the beleaguered Greek economy.



General Election 2010
Tory claims that hung parliament would cause meltdown are dismissed

Credit rating agency rejects warning that Britain would be plunged into financial crisis if election result is inconclusive

By Nigel Morris, Colin Brown and Sean O'Grady

Saturday, 24 April 2010

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Fears of an economic meltdown in the case of a hung parliament have been dismissed by a leading credit rating agency and senior economists.

Analysis by The Independent suggests that of the 16 countries worldwide who currently have the top triple-A financial stability rating, 10 are run by coalition governments. The majority of nations that have taken the toughest action in recent decades to tackle their debts were also governed at the time by coalitions.

David Cameron and George Osborne, the shadow Chancellor, have warned that a hung parliament would spark a sterling crisis and the intervention of the International Monetary Fund, which is helping to bail out the beleaguered Greek economy.
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But the Moody's ratings agency yesterday argued that such an election result could actually make it easier to push through the spending cuts essential to cut the deficit as a plan agreed by a coalition would have broad public support.

Arnaud Mares, its lead UK analyst, said: "A hung parliament does not in itself have direct implications for Moody's UK rating. The three main parties broadly agree on the desirability of fiscal consolidation on a scale that, if implemented strictly over the course of the next parliament, would be consistent with the Government maintaining its Moody's AAA rating."

Another ratings agency, Fitch, assessed Britain's prospects to be "stable", a view it said it had reached bearing in mind the possibility of a hung parliament.

The Standard and Poor's agency lowered its assessment to "negative" almost a year ago, when the Conservatives were in a strong opinion poll lead.

Sixteen countries currently enjoy a triple-A rating – awarded to nations deemed to have close to zero risk of defaulting on their debts – from the main credit ratings agencies. Ten, including Germany, the Netherlands, New Zealand, Sweden and Switzerland, currently have coalition governments and 12 use a form of proportional representation for elections.

History also suggests that having large majorities in government does not prevent crises of sterling. The 1949 and 1967 devaluations both took place when Labour had a clear majority. In 1985 sterling fell to just over $1 when Margaret Thatcher had a landslide majority, while in 1992 the Tories had a working majority when Britain fell out of the Exchange Rate Mechanism.

In contrast, the last time there was cross-party co-operation in a hung parliament situation – the Lib-Lab pact of 1977-78 – it delivered lower inflation and lower unemployment, a recovery in the value of sterling and the IMF was paid off from the 1976 crisis. The deal saw through painful cuts to public spending.

The House of Commons library also discovered that seven of the toughest 10 "fiscal consolidations" – programmes of belt-tightening – in the Western world since 1970 were undertaken by coalition administrations.

The City is becoming accustomed to the idea that the election on 6 May will not deliver the decisive Conservative victory that it might have wished for. Consequently investors have already factored a hung parliament into their calculations.

The City research consultants Capital Economics yesterday said in a briefing note to investment houses that markets were "becoming rather less fearful of the prospect of a hung parliament". It said it had warned in February "some of the worst fears over a hung parliament might be overdone and there are signs that the markets are starting to come round to that view".

Jonathan Loynes, its chief Europe economist, said: "We are not suggesting that all worries about a hung parliament are completely misguided. We are at a precarious position and the finances are in a mess. Action must be taken to sort them out very quickly. But there is growing recognition among the parties that further action to address the fiscal problem is needed. The markets have taken heart from that in the past week."

Investment consultant Desmond O'Driscoll, of Lighthouse Financial Initiatives, said: "Whatever nasty medicine has got to be taken, it would be more acceptable coming from a consensus government."

James Caan, the entrepreneur who features in BBC2's Dragons Den, said: "The financial markets are anticipating a hung parliament, and it will come as no surprise to them. Now it is becoming increasingly likely they will be factoring this into their assessment of the economy and government borrowing."

http://www.independent.co.uk/news/uk/politics/tory-claims-that-hung-parliament-would-cause-meltdown-are-dismissed-1952954.html