LONDON/NEW YORK Britain looked poised to lose its AAA rating from a second ratings agency after Fitch Ratings warned on Friday it was likely to downgrade the country in the coming weeks, citing high government debt levels and weak growth.
A month since Britain was downgraded by Moody's, Fitch put the country on review and said a downgrade was a heightened possibility. A decision is due by the end of April, Fitch said in a statement.
Sterling fell sharply, dropping half a cent against the dollar.
The review announcement comes hard on the heels of the government's annual budget this week, which halved Britain's growth forecast for this year and raised borrowing projections.
The move by Fitch was not unexpected but will be another setback for Chancellor George Osborne. He has staked his reputation on repairing Britain's public finances and had promised to protect its triple-A rating.
Britain's finance ministry, which is three years into an austerity plan, said Fitch's announcement showed "there are no easy answers to problems built up over many years".
"But we are, slowly but surely, fixing our country's economic problems," a Treasury spokesman said, citing a reduction by one third of the budget deficit and the creation of 1.25 million jobs since the government took office in 2010.
The opposition Labour Party, leading in the polls before an election due in 2015, said Osborne's budget had been a "wasted chance" to change economic course. It wants the government to water down its austerity policy and do more to find growth.
"Osborne's plan has catastrophically failed on growth, living standards and the deficit," Labour finance ministry spokesman Chris Leslie said in a statement.
Fitch first warned that Britain's rating was under threat in March 2012 when it noted debt levels were already "significantly above the AAA median" and the government had very limited room for manoeuvre.
Since then, the economic outlook has deteriorated, pushing the government's deficit-reduction strategy further off course.
Osborne's budget statement on Wednesday included a halving of estimated economic growth this year to just 0.6 percent.
With the Moody's downgrade last month, it joined the United States and France in having lost its top-notch rating from at least one major agency.
Standard & Poor's rates Britain as AAA but cut the outlook on that rating to negative last December, implying a one in three chance of a downgrade.
While Fitch's warning is embarrassing for a government that made the economic recovery its number one priority when it came to power in 2010, its wider fallout may be limited, analysts said.
"There are so few countries left now with a AAA rating, that to lose it is not the stigma or major threat to market confidence that it would have been say a couple of years ago," said Howard Archer, chief UK economist at IHS Global Insight.
"Nevertheless, Fitch's move rubs in the bad news for the government."