Moody's Strips UK's Treasured Triple-A Rating; First Ever Sovereign Downgrade Strengthens Demand For Policy Change

  on February 23 2013 3:57 AM

In a major blow to the United Kingdom, Moody's Investors Service stripped the country of its coveted triple-A sovereign rating on Friday, saying the nation's rising debt burden and weak growth prospects weigh on the economy. Moody’s lowered the U.K.'s domestic and foreign-currency bond rating by a notch from Aaa to Aa1.

The sovereign rating downgrade -- the first ever for the nation that's proud of its credit worthiness and position as major global economic player -- was not welcome, although it was not unexpected. All three major rating agencies -- Fitch, the S&P and Moody’s -- issued a negative outlook for the country, which is struggling with a sluggish economy and a fiscal deficit.

Moody’s said that subdued economic growth prospects and the country's "high and rising debt burden" were behind its decision to reduce the ratings. It also said that despite considerable economic strengths, it expects the country’s growth to remain sluggish until 2016 due to a mix of weak global economic activity -- especially in the euro zone -- and a drag "from the ongoing domestic public and private sector de-leveraging process,” Reuters reported.

"This period of sluggish growth poses challenges to the government's fiscal consolidation program, which we now assume will extend well into the next parliament," Moody's analyst Sarah Carlson said in a telephone interview with Reuters.

However, the ratings agency said that the credit worthiness of the country remains positive and strong and the outlook has been changed to “stable.”

The downgrade is also seen as a major blow to U.K. Finance Minister George Osborne, who earlier had pledged to defend Britain’s top sovereign rating and has been pushing austerity measures to eliminate the budget deficit since his government came to power in 2010. Osborne had been maintaining the triple-A credit rating is a key element of economic planning.

In the Tory manifesto, published in 2010 after ascending to his post, Osbourne said: "We will safeguard Britain's credit rating with a credible plan to eliminate the bulk of the structural deficit over a parliament," the Guardian reported.

Osborne in a statement Friday said the downgrade reinstates the need for further fiscal regulation and that he will go ahead with the economic recovery plan.   

"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.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said, promising to go ahead with the debt-cutting program. "We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs," AFP reported.

The U.K. had seen two rounds of recession since 2008’s banking sector crash and the public sector debt has peaked to more than 1 trillion pounds, over 70 percent of GDP. The Conservative-led government in a desperate attempt to reign in the debt is intending to cut 50 billion pounds ($80 billion) in spending by 2015. The economy contracted by a surprising 0.3 percent in the last three months of 2012, after growing by 0.9 percent in the previous quarter. Another contraction in the current quarter would indicate the country has entered into another round of recession.  

So far, Osborne through his austerity measures is successful in reducing the debt by a quarter and the high employment rates, which surged to 29.7 million in 2012 – the highest since records began in 1971. These are regarded as a positive sign for the economy.

However, his critics in the government and opposition believe that Osborne’s austerity measures have failed to take off and that the economic recovery will not happen by the next general elections in 2015, as claimed by the finance minister. The opposition and some of the economists have been calling for a change in the economic policy toward boosting growth with stimulus measures.

"This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility," said Ed Balls, the Labor Party's main spokesman on finance issues.

"The issue is no longer whether this Chancellor can admit his mistakes but whether the Prime Minister can now see that, with U.K. economic policy so badly downgraded in every sense, things have got to change," Balls added, Reuters reported.

British investment manager and Liberal Democrat politician Lord Oakeshott said he believes the markets have fallen because bank lending and house building are "flat on the floor."

"If there is no change, the economy is going to remain being stuck. It matters most for [George Osborne] because he was the one saying that before the election that it wouldn't happen," he told the Guardian.

"The policies are not bold enough, they are not working, the economy is flat and I am afraid that the economy is just not working."

Join the Discussion