Moody's rating agency places UK on negative outlook

 
Pile of one pound coins The change implies a 30% chance the UK's rating will be downgraded in the next 18 months

The UK has been warned its credit rating may be cut in future, potentially increasing borrowing costs.

The statement from the Moody's ratings agency followed concerns about the possible impact of the eurozone crisis on the UK's growth prospects.

It put the UK on "negative outlook", implying a 30% chance of losing its AAA credit rating within 18 months.

France and Austria have also been warned and Italy, Spain and Portugal's ratings have been lowered.

Chancellor George Osborne said the comments from the US agency was not a criticism of his government's economic policy.

"It was a reality check for the whole political system that Britain has to deal with its debts, that we can't waver in the path of dealing with our debts," Mr Osborne told the BBC.

"This is yet another organisation - in this case a credit ratings agency - warning Britain that if we spend or borrow too much we're going to lose our credit rating," he added.

Start Quote

Britain could go through all this austerity and still lose its Triple A, due to a slow or stagnant economy.”

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However, shadow chancellor Ed Balls said the Moody's statement was a warning to the UK.

"Unless you have growth, if your plan is unbalanced it becomes self-defeating and today is the first evidence that even the ratings agencies are waking up to the fact George Osborne's plan is not working," he told the BBC.

"I have said consistently and in the face of the views at times of ratings agencies, that without growth, without jobs, you can't get the deficit down," he added.

BBC economics editor Stephanie Flanders said there was no suggestion that the agency would prefer the UK government to change its economic policy of austerity.

However, she added the agency's warning means spending cuts may not prevent the UK losing its credit rating - if growth falls.

Crisis jargon buster
Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating
The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

In its statement, Moody's said: "Any further abrupt economic or fiscal deterioration would put into question the government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16."

The downgrades had been justified by the "growing financial and macro economic" risks from the eurozone crisis, it said.

'Little impact'

Like personal credit scores, sovereign credit ratings are an indication of how risky it is to lend money to a country.

A high credit rating from the three main agencies, Moody's, Standard & Poor's and Fitch, implies that borrowing to fund public spending will be relatively cheap.

If the rating is lowered this can push up the interest rate on new borrowing for governments.

Analysis

Treasury sources have sought to play down the significance of the ratings agency Moody's decision to place the UK's Triple A rating at risk.

The source said the decision was not "entirely unexpected" given the difficult economic situation facing the UK.

The source said that Moody's made clear any "discretionary fiscal loosening" would make a downgrade more likely and that this underscored the need for the government out stick to its deficit reduction strategy.

However, many analysts believe a fall in the UK's rating would have little effect.

"It's all relative," said Laura Lambie from William de Broe

"We did see America being downgraded, they lost their AAA rating last year and that didn't have a huge detriment, in actual fact it was reasonably positive they are still seen as a safe haven when compared to other countries such as Greece and Spain, and I suspect Britain will be the same." she added.

The UK's "negative outlook" is the lowest level of warning offered by the agency - and can be followed by a "negative watch" implying a more than 50% chance of downgrade.

The agency said the UK faced three main risks to its top rating; slower growth and the possible impact on spending cuts, a sharp rise in borrowing costs due to inflation or a new crisis in the banking sector.

However, the agency noted the UK "continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area".

 

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  • rate this
    +8

    Comment number 261.

    I agree with a lot of comments on here that we shouldn't be relying on Moodys' so called credit rating, esp when they helped start this mess with rating sub prime mortgages, however we cannot keep using QE as a method to hide from our debts, its only covering up the issue and one day down the line we will be worse off once it all comes to light and actually have to face the music.

  • rate this
    +44

    Comment number 37.

    I think it's a scandal that these credit rating agencies wield so much power that they can virtually dictate fiscal policy.... 'Either do what we suggest or you lose your AAA rating'.

  • rate this
    +17

    Comment number 30.

    Those blaming the Government don't understand...... Without their actions to date we would have lost the AAA status by now .... And be heading the way of Spain et al.

    Yes we need growth but the previous Government spent so much there is little left to stimulate the economy and too much debt.

  • rate this
    -46

    Comment number 2.

    I thought that the government's austerity measures were needed to maintain our AAA rating on the money markets so we could keep our borrowing costs down? If government policies mean we lose our AAA rating, isn't that a good indication that those policies are failing?

 
 

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