Moody's gives UK high scores but warns of 'challenges'

Chancellor George Osborne Moody's says the deficit reduction plan overseen by chancellor George Osborne was key to its top rating

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Ratings agency Moody's has given the UK high scores for economic governance but warns the country it faces "formidable and rising challenges".

In its annual guidance for investors, Moody's says the UK has "significant structural strengths" and deserves its top AAA rating.

But it says weakness in the eurozone could hold back growth and weaken the government's debt-cutting plans.

Rating agency opinion affects the cost of borrowing.

Moody's, along with Standard & Poor's and Fitch, are the most influential agencies and a downgrade by one or all of them can drive up a country's borrowing costs.

Strengths highlighted by the report include long-term economic fundamentals, and institutional and government financial strength.

But, it said: "A need to support the banking system could temporarily set back the government's fiscal consolidation efforts.

"As a result, the outlook on the rating is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union."

Partial cushion

Moody's recently placed the credit ratings of all eurozone countries under review.

It said the UK was only partially cushioned from the crisis: "The outlook on the rating is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union."

But it praised the UK as "one of the most competitive of the large advanced economies in the world" and for its "track record of reversing increases in debt over many decades".

The agency added that the independent financial watchdog, the Office for Budget Responsibility, which was set up by the coalition government, had helped strengthen the country's fiscal institutions.

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