On Thursday, Moody’s issued a report on the state of Britain’s economy and issued a warning that Britain’s coveted AAA rating was under threat, writes Ust Oldfield.
The reason Moody’s gave is due to the weakness of growth in 2011 and 2012. On Wednesday the Chancellor, George Osborne, issued the budget for 2011/12. The budget contained a downgrade of the growth forecast. 1.2% growth down from 1.7% for 2011, and 2.5% down from 2.6% for 2012.
So why would Moody’s threaten to downgrade Britain’s credit rating when there is growth, no matter how weak it is, and the deficit is being dealt with?
I suspect it was the concrete announcement of the Green Investment Bank (GIB). The GIB will be founded and funded by the government to the sum of £2bn. There is hope that this will be matched, and exceeded, by private investment with it all being secured by the taxpayer as a way of incentivising investment.
The purpose of the GIB is to supply funding, through loans, to green startups and green infrastructure developments in order to ‘boost’ the green credentials of Britain. The Bank is needed because green projects have traditionally had low rates of return and many have failed to take-off. They are high risk, low yielding investments – unattractive to any investor.
Due to the nature of green investments and how the Bank is being operated and established, the liability to the taxpayer could be a lot larger than the initial £2bn if it fails. This liability, I suspect, is also behind Moody’s warning.
But is a downgraded debt a risk worth paying to protect the environment?
In short, yes.
The reasoning behind this, despite the high risk involved, is because of the indirect contribution to the economy. If it takes-off, which I am sure it will, the GIB will add to the diversification of the economy, something which has been lacking recently, bring about cheaper energy bills for us all, thus more disposable income, and, eventually, produce energy, skills and manufactured technology for export.