If Britain’s Triple A credit rating is under threat, can America and Japan be far behind?

Ratings groups cut and then restored Japan’s ratings in the 1990s, but America would be the big call, an adjustment that would have a cascading impact through the world, especially in China, Japan, Taiwan and South Korea, countries where central banks have invested their foreign reserves in Triple A-rated US Government bonds and notes.

But if Standard & Poor’s cuts the UK’s rating after next year’s election, because the UK government’s finances are worsening and debt is soaring, why not the US, why not Japan?

S&P said in this statement that the UK rating of AAA outlook was lowered to “negative” from “stable” because of the nation’s increasing “debt burden”.

The UK Government’s budget deficit this year will reach 175 billion pounds ($US273 billion), or 12.4% of gross domestic product, as outlaid in the recent budget, but there’s every chance of that rising.

The UK plans to sell a record 220 billion pounds of bonds in the fiscal year through March 2010 as the recession cuts revenue and forces the government to raise spending.

A downgrade would make Britain at least the fifth European Union nation to have a ratings cut this year because of the economic slump, joining Ireland, Greece, Portugal and Spain.

S&P analysts including David Beers said in the report:

“We base our opinion on our updated projections of general government deficits in 2009-2013. These projections reflect our more cautious view of how quickly the erosion in the government’s revenue base may be repaired, the extent to which the growth in government spending can be curtailed, and consequently the pace at which historically high fiscal deficits are likely to narrow.”

“Our projections also incorporate updated estimates of the cumulative potential gross fiscal cost of government support to the banking system, which we now estimate to be in the range of £100 billion-£145 billion, or 7%–10% of 2009 estimated GDP. Taken together, these factors could, in our opinion, result in a doubling of the general government debt burden to nearly 100% of GDP by 2013. A government debt burden of that level, if sustained, would in Standard & Poor’s view be incompatible with a ‘AAA’ rating.”

The same statement could be broadly written about the US and Japanese economies and debt positions, as they stand now, and prospectively up to 2013.

The British economy, the second largest in Europe, contracted 1.9% in the first quarter, the biggest contraction since 1979. That will go on (and the contraction will end up around 3.5% for the UK financial year) before a rebound starts next year. Its contraction will be deeper than in the US. Unemployment will remain a problem, as it will in the US and Japan (and elsewhere).

Japan’s debt is already over 100% of GDP and will rise further with the Government spending close to $US200 billion in various support packages (and probably more), America has passed a near $US800 billion stimulus package, has the $US700 billion assistance funds to banks and others, has the Fed pumping tens of billions of dollars from its balance sheet into frozen credit markets and will raise over $US1.5 trillion in new debt this year (estimated) as Government tax revenues collapse.

US Government debt will approach is around $US11.2 trillion, or around 80% of GDP. the current US Government debt ceiling is just over $US12.1 trillion. GDP is just over $US14 trillion at the end of the March quarter. It has fallen. It fell more than $US330 billion in the six months to March, even though the budget deficit blew out by an estimated three times that figure in the same period.

For the UK and its expenses scandal ensnared politicians, there was a “cut spending or else” warning in the Standard & Poor’s statement:

“The rating could be lowered if we conclude that, following the election, the next government’s fiscal consolidation plans are unlikely to put the U.K. debt burden on a secure downward trajectory over the medium term … conversely, the outlook could be revised back to stable if comprehensive measures are implemented to place the public finances on a sustainable footing, or if fiscal out-turns are more benign than we currently anticipate.”

And Australia? Standard & Poor’s issued a note on budget night last week, specifically ruling out any change in our AAA rating, or outlook, because we had gone into deficit and would build up debt over the next seven years.