Adds comments from S&P Global, paragraphs 10, 21

By Marc Jones

LONDON, June 16 (Reuters) - Credit rating agencies weighing how Andy Burnham could shape Britain's public finances as prime minister expect any bold fiscal policy shifts to be constrained by bond markets for now.

Greater Manchester mayor Burnham is contesting a by-election on Thursday which, if he wins, would propel him back into parliament and into pole position to challenge Prime Minister Keir Starmer for the leadership of the ruling Labour Party.

Burnham is seen as more interventionist than the struggling Starmer, but analysts say the potential switch comes at a delicate moment for Britain, with limited fiscal headroom and memories of the 2022 Liz Truss market turmoil still raw.

Moody's sovereign analyst Marie Diron said that while Burnham may be constrained by the risk of a repeat of that crisis, rating firms will focus on the policy changes that he — or any new prime minister — ultimately delivers.

"There might be statements made by would-be future leadership candidates (about providing more fiscal support), but it is likely that the reality (of tight finances) is going to come in the way of the more ambitious actions," Diron said.

"What would be more significant for the rating is, as a result of what we are seeing, a major shift in policy."

SPENDING PRESSURES

Still, the uncertainty alone has already unsettled markets, while pressure for more spending on key priorities is mounting.

Starmer's defence minister John Healey and ​armed forces minister Al Carns both resigned last week, with Healey saying Britain's defence investment plan fell "well short of what is required for defence of the country at this dangerous time."

Burnham has also said Britain's most troubled water company, Thames Water, should be nationalised, potentially alongside other key public utilities.

"The fear is that with this turmoil on the political side we see potentially a new leader who is less committed to the fiscal story, and then that also puts pressure on the markets," S&P Global sovereign analyst Ravi Bhatia said.

Fitch's head of Western European sovereigns, Federico Barriga-Salazar, said its AA- rating for Britain assumes a gradual "improvement" in the fiscal position, leaving limited tolerance for slippage.

"If that (improvement) doesn't happen, then we would have to reassess," Barriga-Salazar said.

He added that while a new prime minister could seek to change the government's fiscal rules to allow more spending, that would not affect the rating process.

"What we care about is the ultimate trajectory of public debt and public deficit," Barriga-Salazar said.

SCENARIOS

Burnham said earlier this month that his plans would be bound by the government's existing fiscal rules. He previously spoke of excluding defence spending from those calculations.

With UK debt already around 100% of GDP, Scope Ratings analyst Thomas Gillet outlined two scenarios for the rating.

If government leadership and the Iran war are resolved quickly, "stabilising debt-to-GDP would remain challenging and take time, but it would be possible," Gillet said.

"More concerning" would be prolonged uncertainty, pushing up borrowing costs and intensifying market scrutiny.

"The question would then be, to what extent the government could stabilise the debt-to-GDP ratio," Gillet said. "It could be a bit like what we saw in 2022 with the (Truss-led) Conservative Party."

S&P Global has also said the main risk to its AA 'stable' rating is if fiscal or external performance deteriorates significantly beyond its April forecasts of a 4.7% deficit and 1.1% GDP growth.

S&P Global's Bhatia said "the sensitivity around 100% net debt stock is hardwired into our metrics, so if we see a deterioration there... that could put pressure on the rating."