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Moody's strips UK of triple-A credit rating

Agency cuts rating by one notch, saying weak growth prospects have derailed government's deficit-reduction strategy.
Last Modified: 23 Feb 2013 11:42
Finance Minister George Osborne says downgrade shows Britain cannot 'run away' from debt problems [EPA]

Britain has suffered its first ever sovereign ratings downgrade from a major agency after Moody's stripped the country of its coveted top-notch triple-A credit rating, dealing a major blow to finance minister George Osborne.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."

- George Osborne, UK finance minister

"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 on Saturday.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."

Moody's said weak prospects for British economic growth, which have thrown the government's deficit reduction strategy off course, lay behind its decision to cut the rating by one notch to Aa1 from Aaa.

Austerity has been the watchword for Osborne's fiscal policy since his Conservative-led coalition came to power in 2010 after an election in which he vowed to defend Britain's triple-A rating, which can help keep down borrowing costs.

But a very slow recovery from the financial crisis has pushed back by at least two years the government's goal of largely eliminating the budget deficit by 2015's election.

The opposition Labour Party blames the deficit on too much austerity.

Ed Balls, Labour's shadow chancellor, told the BBC the downgrade was a "humiliating blow" for Osborne and called on him to act fast to kickstart the economy.

"What matters is the underlying economic reality and what has happened is the credit rating agencies have caught up with the facts," he said. "There has been no growth now for two years, our deficit is getting bigger."

'Pretty big deal'

Nonetheless, Osborne insisted now was not the time to change course. His annual budget due on March 20 is expected to show a further deterioration in the country's fiscal outlook.

However, the downgrade may fuel unease amongst members of his own party and his Liberal Democrat Coalition partners that Osborne's gamble could slash deficit and ensure a return to growth by the May 2015 election.

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Sterling fell by almost a cent to around US $1.5160 after the downgrade, just off Thursday's fresh 2-1/2-year low, and analysts expected it to weaken further on Monday, even if many had seen a downgrade coming sooner or later.

"It's a pretty big deal," said Kathy Lien, managing director at BK Asset Management in New York.

"We didn't see a huge reaction in the pound because it's late in the New York session. But you'll see some more aggressive selling when markets open [in Asia] on Sunday."

Moody's said the outlook on its rating on Britain was now stable, meaning any further change is unlikely for the next year or so.

Britain joins the US and France in having lost its triple-A rating from at least one major agency, after holding a top-notch rating from Moody's and Standard & Poor's since 1978, and from Fitch Ratings since 1994.

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Source:
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