Moody’s downgrades UK sovereign credit rating



While traders and investors in the Philippines rejoice over all-time highs in the stock market, favorable economic conditions and positive consumer outlook, the opposite seems to be the state of norm in the Eurozone area — with more news of recession, austerity programs and credit rating downgrade coming from that part of the world.

The latest in the recent spat of bad news from Europe is the announcement of ratings agency Moody’s that it is downgrading Britain’s sovereign credit rating for the first time in the country’s history.

On February 22, top credit rating agency Moody’s stripped the United Kingdom of the highly-coveted Aaa rating and downgraded it one notch lower to Aa1.

“Aa1” is still an “investment-grade” rating, but the downgrade signals a weakening in the country’s ability to pay sovereign debt. Credit ratings are a measure of an entity’s credit-worthiness and a downgrade shows a diminished capacity to meet financial obligations (Learn more about credit ratings in the article Credit Ratings by S&P, Moody’s and Fitch Ratings).

In the downgrade announcement, Moody’s also changed the outlook on the nation’s debt from stable to negative. In its decision, the ratings agency cited weakness in UK’s growth outlook and challenges to the government’s fiscal consolidation program.

“Despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public and private sector deleveraging process,” the agency said.

Moody’s also believes the UK will experience continued periods of “sluggish growth” in the next 3-5 years and the country’s fiscal position will most likely remain unchanged and will not be reversed before the year 2016.

The ratings downgrade is a big blow to the administration of George Osborne, Chancellor of the Exchequer, who has pinned his hopes on retaining the triple-A rating while implementing various austerity measures and fiscal spending cuts. The opposition Labour Party has previously decried the fiscal squeeze, arguing that the cuts in fiscal spending only worsens the country’s economic recovery.

In the fourth quarter of 2012, the UK economy shrank 0.3% on a quarterly basis, putting the country on the brink of a recession.

With the downgrade, the United Kingdom leaves the elite group of 15 countries still enjoying the top Aaa status. Among these countries is the United States, which is still in the triple-A league albeit currently with a negative country outlook. The United States has earlier been downgraded in 2011 by Standard and Poor’s, another credit rating agency, from AAA to AA+.

The impact of a credit rating downgrade is explained in the post Impact of the US Credit Rating downgrade by S&P.

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