Rating agency Moody’s stripped the United Kingdom of its AAA credit rating on Friday, making
it the latest European country to face a downgrade amid the continent’s grim growth prospects.
reports the CNN.
The UK was knocked down one notch to Aa1, with its ratings outlook at stable. Moody’s said the
key drivers of the downgrade included the country’s rising debt burden and tepid growth_outlook
over the next few years.
“Although the UK’s debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other AAA-rated issuers,” Moody’s said.
The UK had held AAA status since Moody’s first began rating the country in 1978.
In December, the UK’s budget monitor projected that the country’s economy would grow by just 1.3% this year. The government has been pushing a much-criticised austerity program, and finance minister George Osbourne said he remained committed to those efforts, even after the downgrade.
“This is a stark reminder of the debt problems that Britain faces and the clearest possible warning
to anyone who thinks we can run away from dealing with those problems,” he said. “Far from weakening our resolve to deal with our debts, this should redouble our resolve.”
The British government has said its belt-tightening will have to continue until 2018.
In announcing the downgrade, Moody’s said it expects the UK’s debt to peak at 96% of GDP in 2016, up from around 90% today.
A year ago, Moody’s switched the outlook on the UK’s AAA rating to negative, in a prelude to
Friday’s downgrade. At the same time, the firm cut the ratings of half a dozen European countries.
The other major rating agencies, Fitch and Standard & Poor’s, still have the UK rated AAA, though with negative outlooks.
Elsewhere in Europe, France lost its AAA rating from Moody’s in November, after a similar
downgrade from S&P in January.
The United States maintains its AAA rating from Moody’s and Fitch, though it was downgraded
by S&P in August 2011 following the debt ceiling standoff in Washington.
Steven Englander, a foreign exchange strategist with Citigroup, said in a research note following
the downgrade that the move was unlikely to raise borrowing costs for the UK, as bond yields
in the United States, France and Japan had remained stable following similar downgrades. But it
increases pressure on the country to pursue growth by weakening the pound, he added.
“While by itself the announcement merely accelerates what was expected to happen at some
point, the need for weakness (in the British pound) will become more apparent to policymakers
and investors,” Englander said.
Among Europe’s other major economies, Germany, Switzerland and the Netherlands maintain
their AAA ratings from Moody’s. France sits at Aal, while Italy is down at Baa2 with Spain at
Baa3.