Britain suffered its first-ever sovereign ratings downgrade from a major agency on Friday when Moody’s stripped the country of its coveted top-notch triple-A rating, dealing a major blow to British Chancellor of the Exchequer George Osborne.
Moody’s said weak prospects for British economic growth, which have thrown the government’s deficit-reduction strategy off course, lay behind its decision to cut the rating by one notch to “AA1” from “AAA.”
Austerity has been the watchword for Osborne’s fiscal policy since his Conservative Party-led coalition came to power in 2010 after an election in which he vowed to defend Britain’s triple-A rating, which can help keep down borrowing costs.
However, a very slow recovery from the financial crisis has pushed back by at least two years the British government’s goal of largely eliminating the budget deficit by 2015’s election.
The opposition Labour Party blames the deficit on too much austerity.
Nonetheless, Osborne insisted now was not the time to change course. His annual budget — due on March 20 — is expected to show a further deterioration in the country’s fiscal outlook.
“Tonight we have a stark reminder of the debt problems facing our country and the clearest possible warning to anyone who thinks we can run away from dealing with those problems,” he said in a statement. “Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.”
However, the downgrade may fuel unease among members of his own party and his Liberal Democrat coalition partners that Osborne’s gamble that he could slash the deficit and ensure a return to growth by the May 2015 election is failing to pay off.
The British pound fell by almost US$0.01 to about US$1.5160 after the downgrade, just off Thursday’s fresh two-and-a-half-year low, and analysts expected it to weaken further yesterday, even if many had seen a downgrade coming.
“It’s a pretty big deal,” BK Asset Management managing director Kathy Lien said in New York. “We didn’t see a huge reaction in the pound because it’s late in the New York session, but you’ll see some more aggressive selling when the markets open [in Asia] on Sunday [today].”
Moody’s said the outlook on its rating on Britain was now stable, meaning any further change is unlikely for the next year or so.
Britain joins the US and France in having lost its triple-A rating from at least one major agency, after holding a top-notch rating from Moody’s and Standard & Poor’s since 1978, and from Fitch Ratings since 1994.
Moody’s said that despite considerable economic strengths, Britain’s growth was likely to be sluggish due to a mix of weaker global economic activity — especially in the eurozone — and a drag “from the ongoing domestic public and private sector deleveraging process.”
“This period of sluggish growth poses challenges to the government’s fiscal consolidation program, which we now assume will extend well into the next parliament,” Moody’s analyst Sarah Carlson said in a telephone interview.
However, Labour Party financial spokesman Ed Balls said Moody’s decision should be a wake-up call for Osborne ahead of his annual budget statement as chancellor of the exchequer.
“This credit rating downgrade is a humiliating blow to a prime minister and chancellor who said keeping our ‘AAA’ rating was the test of their economic and political credibility,” Balls said. “The issue is no longer whether this chancellor can admit his mistakes, but whether the prime minister [David Cameron] can now see that, with UK economic policy so badly downgraded in every sense, things have got to change.”