Page last updated at 13:31 GMT, Tuesday, 1 December 2009

Hung parliament 'may hurt UK credit rating'

Pound sterling bank notes
The pound could see a sharp fall in value, Morgan Stanley warns

A hung parliament in 2010 could cause the UK to lose its triple-A rating, analysts at Morgan Stanley have warned.

The investment bank suggested a minority or coalition government would hit investor confidence and cause rating agencies to downgrade the UK.

A downgrading of the UK's credit rating would make it much more expensive for the government to borrow money.

The government said measures would be taken to ensure the public debt was reduced in the coming years.

The warnings come in two reports by Morgan Stanley on the outlook for the economy next year.

Debt crisis

The bank highlights the poor state of government finances as a cause for concern, warning of the risk of a major debt crisis in the UK over the coming months.

The next general election could act as a catalyst for this, analyst Graham Secker said, as a minority or coalition government would find it more difficult to deal with the problem of government debt.

"An inconclusive result in the general election could increase uncertainty in markets, it could put some downward pressure on sterling and upward pressure on bond yields," he said.

"If we end up with some form of coalition or minority government, it could be difficult to make the necessary adjustments in the economy to fix these problems."

Rating concern

A loss of confidence could result in a "sharp drop" in the value of the pound, the investment bank's report added.

That along with a loss of confidence among investors could "increase the probability that some of the rating agencies remove the UK's triple-A status," it suggested.

In response, the Treasury said: "The UK continues to have the highest AAA sovereign debt credit rating with all three major credit rating agencies."

"The government remains committed to sustainable public finances and has set out clear plans in the Budget to reduce borrowing once the economy is recovering and to reduce debt as a percentage of the economy once these shocks have passed through the economy in full."

It added that legislation would be introduced to ensure that the budget deficit is reduced year on year, with more details to be announced in the Pre-Budget Report.

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