Merrill Says Market Is Pricing Pound for Rating Cut

By Matthew Brown

Jan. 22 (Bloomberg) -- The pound is trading at levels that indicate Britain may lose its AAA credit rating as the government increases borrowing to pull the economy out of its first recession in 17 years, according to Merrill Lynch & Co.

“The market is now pricing the pound in expectation of a downgrade,” Merrill Lynch strategists including Emma Lawson in London wrote in a report today. “The pressure” is “on the U.K.,” the analysts wrote.

The British currency traded near a record low against the yen and close to the lowest level versus the dollar since 1985 on speculation the government will take control of some of the nation’s banks. Bank of England Governor Mervyn King said this week officials may start buying assets to bolster lending and Prime Minister Gordon Brown announced his second rescue plan in three months.

The pound fell 1.2 percent to $1.3792 as of 11:44 a.m. in London. It was 1.8 percent lower at 122.60 yen, from 124.88 yesterday. The currency declined for a fifth consecutive day against the euro.

Ballooning budget deficits in Europe are spurring ratings companies to cut sovereign debt grades. Portugal’s credit rating was lowered yesterday by Standard & Poor’s in the third downgrade of a euro-area government in a week. Spain and Greece also had their debt classifications lowered.

Royal Bank of Scotland Group Plc slumped 67 percent in London trading on Jan. 19 on concern the government may have to take full control of the bank after the lender forecast the biggest loss reported by a U.K. company. The government offered to exchange its preference shares in the bank for ordinary stock, a move that may increase its stake to 70 percent from 58 percent.

The Bank of England may acquire securities such as corporate bonds and commercial paper to boost lending to companies and consumers, King said in a speech on Jan. 20.

To contact the reporter on this story: Matthew Brown in London at Mbrown42@bloomberg.net;