Moody's rating agency places UK on negative outlook

14.02.2012 09:11

BBC: The UK's top-rated AAA credit rating has been placed on "negative outlook" by US credit ratings agency Moody's.

It said its decision followed concerns over growth prospects and the possible impact from the eurozone crisis.

The move implies the UK has a 30% chance of losing its AAA credit rating within 18 months.

France and Austria have also been warned by Moody's over their top rating, and Italy, Spain and Portugal's ratings have been lowered.

The Chancellor, George Osborne, said: "This is proof that, in the current global situation, Britain cannot waiver from dealing with its debts."

Shadow chancellor Ed Balls described Moody's action as a "significant warning".

He said: "We have consistently argued that the chancellor's gamble - raising taxes and cutting spending too far and too fast - would backfire," 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.

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.

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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