The U.K. lost its prized AAA bond ratings for the first time since 1978 in the face of sluggish economic growth that is raising challenges to fiscal consolidation.
Moody's Investors Service downgraded the nation's sovereign rating by one notch to Aa1 late Friday, while assigning 'stable' outlook. In a related action, the rating agency also lowered the ratings of the Bank of England to Aa1 from Aaa.
The latest action was taken after a warning last February, and adds more pressure on Chancellor George Osborne to contain the huge public debt. He is set to present the budget on March 20.
Standard & Poor's as well as Fitch placed the triple A ratings of the U.K. on negative watch last year.
"Tonight we have a stark reminder of the debt problems facing our county," Osborne said. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."
The rating agency said the weak economic growth is likely to extend into the second half of the decade and in turn poses challenges to the government's fiscal consolidation programme. Moody's believes the risks to the growth outlook remain skewed to the downside.
The agency expects the gross general government debt level to peak at over 96 percent of GDP in 2016. The projected tax revenue increases have been difficult to achieve due to the challenging economic environment, it said.
Accordingly, the weaker economic out-turn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, Moody's said. The agency pointed out the risk that the U.K. government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.
As a consequence of the U.K.'s high and rising debt burden, Moody's expects a deterioration in the shock-absorption capacity of the government's balance sheet, which, the firm said, is unlikely to reverse before 2016.
However, the agency considers the creditworthiness of the U.K. as extremely high due to its competitive economy, strong track record of fiscal consolidation and a favorable debt structure.
The stable outlook on the rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will allow the government to implement its fiscal consolidation plan and reverse the U.K.'s debt trajectory.
IHS Global Insight's Chief UK economist Howard Archer said the rating downgrade comes as little surprise, and as such may actually mean that there is little negative economic impact from the move. Only very few countries are left with a AAA rating from all of the credit rating agencies, he noted.
by RTT Staff Writer
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