* S&P sees 1-in-3 chance of UK losing AAA rating
* Moody's and Fitch already have negative outlooks for UK
* S&P sees risk of weaker growth, loss of political will
* Gilts already at priciest vs Bunds since Oct 2011
By David Milliken and Daniel Bases
LONDON/NEW YORK, Dec 13 Britain's prized
triple-A credit rating came under fresh threat on Thursday,
after ratings agency Standard & Poor's cut its outlook for UK
government debt to negative.
S&P sees a one-in-three chance that Britain will lose its
triple-A rating, which would be a major embarrassment for
finance minister George Osborne, who has staked his reputation
on strengthening Britain's public finances.
"The outlook revision reflects our view that we could lower
the ratings on the UK within the next two years if fiscal
performance weakens beyond our current expectations," S&P said.
"We believe this could occur in particular as a result of a
delayed and uneven economic recovery, or a weakening of
political commitment to consolidation," it added.
Much weaker official growth forecasts forced Osborne last
week to abandon a pledge to put Britain's net debt as a share of
national income on a downward path by 2015, and S&P cited rising
debt as a key reason for its negative outlook.
S&P had been the last major rating agency to hold a stable
rating on British debt, after the other two, Moody's and Fitch,
gave negative outlooks early in 2012 to their triple-A ratings.
"2013 looks like being a year when the UK could lose its AAA
rating fairly comprehensively," said BNP Paribas economist David
Tinsley. "Some of the safe-haven glow of the UK is looking a bit
Moody's has said it will review its rating in the first few
months of next year, while Fitch has said it would take another
look after Osborne's March 20 budget.
Britain expects to run a budget deficit of 7 percent of
gross domestic product this year, down from 11 percent at the
height of the financial crisis. But it forecasts net debt,
excluding financial sector interventions, will continue rising
and peak at 80 percent in the 2015/16 tax year.
MARKET IMPACT UNCLEAR
While losing the triple-A rating would be a political blow
to Osborne, the market impact on Britain's borrowing costs would
be less certain. The United States and France both lost their
triple-A ratings after the financial crisis, and later saw their
bond yields plumb fresh record lows.
Britain, Germany and Canada are the only major economies to
retain a triple-A debt rating.
Nonetheless, some investors are already edging away from
British government debt. British government bonds' yield premium
over safe-haven German debt rose to its highest since October
2011 earlier on Thursday, before S&P made its announcement.
"You have seen this death of a thousand cuts, a sort of
salami-slicing of the gilt market," said Andrew Roberts, a fixed
income strategist at Royal Bank of Scotland.
Britain's finance ministry stressed that S&P backed the
country's current deficit-reduction plan.
"Standard & Poor's endorse the government's 'strong
commitment to implementing the fiscal mandate' and specifically
warn against slowing 'the pace and extent of fiscal
consolidation'. It is because we have stuck to that commitment
that the deficit is down," a spokesman said.
However, the opposition Labour Party said the rapid pace of
government spending cuts was self-defeating as it reduced
"At the start of this year S&P warned that austerity alone
risks becoming self-defeating. But even as that warning is
coming true, George Osborne is refusing to listen," said senior
Labour Party lawmaker Ed Balls.