Britain lost its top credit rating by Moody’s Investors Service, which cited the continuing weakness in the nation’s growth outlook and the challenges that presents to the government’s fiscal consolidation programme.
The rating on the UK was lowered one level to Aa1 from Aaa and the outlook on the nation’s debt changed to stable, Moody’s said in a statement on Friday. With the UK’s high and rising debt burden, a deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s said in the statement.
The cut will increase political pressure on Chancellor of the Exchequer George Osborne, with the opposition Labour Party calling on him to scale back his fiscal squeeze as the economic recovery struggles to gain traction. Still, investors often ignore such actions, evidenced by the drop in French 10-year bond yields following a downgrade last year and a rally in Treasuries after the US lost its top rating at Standard & Poor’s in 2011.
“Tonight we have a stark reminder of the debt problems facing our country — and the clearest possible warning to anyone who thinks we can run away from dealing with those problems,” Osborne said in a statement in London. “Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.”
“They have drawn a line in the sand that if we don’t put forth a formidable plan we don’t deserve a triple-A rating,” said Joseph Balestrino, senior fixed-income strategist for Pittsburgh-based Federated Investors Inc., which oversees $51.4 billion of assets.
Britain’s debt as a percentage of gross domestic product will climb to 98 per cent next year from 90 per cent last year and 95.4 per cent in 2013, the European Commission said in its winter forecast today.
Osborne’s austerity policies will squeeze the budget deficit to six per cent next year from 10.2 per cent in 2010, when his Conservatives took over in an unprecedented coalition with the Liberal Democrats, according to the predictions by the commission.
‘Shock absorption’
“Because of the combination of weak growth outlook, substantial fiscal challenges, high and rising debt burden, and the deterioration in shock absorption capacity, we see that the credit worthiness of the UK has deteriorated to a level that is more commensurate with Aa1 rating,” Sarah Carlson, a senior credit officer at Moody’s in London, said in a telephone interview.
Osborne said in his autumn statement on December 5 that he’s no longer likely to meet his target to begin cutting the burden of government debt in 2015-16 after his fiscal watchdog cut its growth forecasts. Standard & Poor’s put the UK’s rating on a negative outlook a week later.
Fitch ratings
Fitch Ratings said on the day of the budget that missing the debt target “weakens the credibility of the UK’s fiscal framework.” It will conduct a further formal review of the rating in 2013 incorporating the budget, due March 20. Fitch lowered its outlook on the UK to negative from outlook in March 2012. Moody’s lowered its outlook the previous month.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 per cent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 per cent of Moody’s rating and outlook changes and 50 per cent of those by S&P. That’s worse than the longer-term average of 47 per cent, based on more than 300 changes since 1974.
“Ultimately it’s a fairly minor action and shouldn’t result in a massive bond market response,” said Eric Lascelles, chief economist for RBC Asset Management in Toronto. “This is an era where developed countries are being downgraded on a regular basis.”
