Moody’s threatens UK’s cherished AAA status

Tuesday 14th February 2012

Following the recent downgrades in the credit ratings of Spain, Portugal and Italy, the UK’s AAA rating is under threat as ratings agencies consider a downgrade.

Italy was cut to A2 from A3, Portugal cut to Ba3 from Ba2, Spain downgraded to A3 from A1. Slovakia, Slovenia and Malta also had their ratings cut with negative outlooks.

Late last night credit ratings agency Moody’s put France, Austria and the UK on a “negative outlook” because of their exposure the eurozone debt crisis which many see as a precursor to a downgrade.

All three countries currently hold a AAA rating from Moody’s. Last month Standard & Poor’s downgraded France and Austria, one notch to double A.

Moody’s said it said it was worried about Europe's ability to undertake the reforms needed to address the crisis and the amount of funds available to fight it. It also said the region's weak economy could undermine austerity drives by governments to fix their finances.

The U.S. rating agency said it changed the outlooks for the ratings of France, Britain and Austria to negative due to "a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns' balance sheets".

Analysts said the move could jeopardise sterling's relative safe-haven status compared to the euro and deter investors from switching out of euro-zone sovereign debt into UK gilts. 

Any downgrade would increase the cost to the government of borrowing money, which would lead to rising mortgage rates that, in turn, would plunge the UK further into the red.

However, the UK government could take comfort as Moody’s endorsed the its austerity programme and warned that failure to stick to the deficit reduction plan would make matters worse.

Moody’s said, “the [UK] government is implementing an ambitious fiscal consolidation programme”, and remarked on “its commitment to restoring a sustainable debt position”.

And it said the rating could be at risk if the UK demonstrated “reduced political commitment to fiscal consolidation, including discretionary fiscal loosening”.

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