Former chancellor says downgrade threat helped policy

Alistair Darling
Image caption Former Chancellor Alistair Darling had to deal with the threat of Britain losing its top credit rating

Former Chancellor Alistair Darling has told the BBC that a credit rating agency's negative verdict on the UK helped him "enormously".

In May 2009, Standard & Poor's moved the UK from a "stable" to a "negative" outlook.

In simpler terms, the agency was putting the UK on notice that it could lose its coveted triple A rating.

But Mr Darling says his hand was then "strengthened" in disputes with Prime Minister Gordon Brown.

Mr Darling's comments come at a time when several governments have vented their anger about downgrades.

Mixed emotions

The US administration was outraged when Standard & Poor's removed the United States' triple-A rating.

Eurozone governments have railed against agency decisions to downgrade as the financial crisis worsened.

Back in May 2009, the news shocked the Treasury's senior mandarins, as the UK's AAA rating had never been threatened before.

It was a sensitive time, a year before the general election, with the opposition highly critical of the Labour government's fiscal policies.

But the then chancellor says he had mixed emotions.

Speaking to BBC Radio 4's File on 4, Mr Darling said that the Standard & Poor's analysis actually helped him in his battles with Gordon Brown and Number 10 over the need to reduce the deficit.

"It is well documented at the time there was something of an argument going on in the government," he said.

"Actually the downgrading helped me enormously, because that strengthened my hand in saying, look, we have to have a credible plan."

Warning shot

Mr Darling said the Treasury had been notified by S&P the night before the announcement was going to be made to the markets.

He was on his way with Gordon Brown to the CBI annual dinner. The prime minister had amended the speech he was set to make.

"He said, look, I will put something into the speech, making it very clear that we will do everything we need to get our borrowing down."

"He was very aware of the problem but, you know, I suppose when someone fires a warning shot across your bows it concentrates the mind."

The Commons Treasury Select Committee is about to embark on an investigation into the ratings industry.

The chairman, Conservative MP Andrew Tyrie, feels the major agencies, S&P, Moody's and Fitch, have a case to answer after mistakes made during the US sub-prime housing crisis.

It has been alleged that the agencies gave favourable ratings to mortgage securities under pressure from banks which were funding those ratings.

Mr Tyrie told the BBC: "At a key moment in the development of this crisis, they got a large chunk of the work they did systemically wrong."

"A lot of institutions relied on it, banks, regulators and investors and as a result we've all taken a big hit. "

Mr Tyrie said the committee inquiry would focus on whether further regulation might be required and whether so much reliance should be put on the agency assessments.

The agencies deny any conflicts of interest and point out that their track records are robust.

A tiny proportion of bonds ranked at investment grade default within five years. But they will have to put their case to an increasingly sceptical political audience.

Listen to the full report onFile on 4onBBC Radio 4on Tuesday, 28th February at 20:00 GMT and Sunday, 4th March at 17:00 GMT. Listen again via theRadio 4 websiteor download thepodcast.

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