2013-02-25 – London
Moody’s the rating agency has downgraded the UK’s AAA credit rating. Moody’s identified poor growth prospects and the continuing, rising, debt burden faced by the UK as the reason for the move.
In terms of the real impact on the economy, however, the move could be largely insignificant. Britain is now just the latest target to be part of this action following downgrades last year to France’s AAA rating to AA1 by Moody’s and the US AAA rating to AA+ by Standard & Poor in August 2011.
The downgrade to the US economy was actually followed by a period of strong economic growth compared with Europe. In fact, borrowing cost in the US actually went down. The UK rating will act only as an indication of what we already know about the state of the economy – that we are going through a rebalancing phase with stringent deficit reduction measures following the financial crisis.
French long-term borrowing rates were only very slightly above the UK’s following their downgrade on 20th November last year. Crucially, the UK’s credit rating has an impact only on the UK’s borrowing rates; however, given the current, already very low rates available to the UK due to quantitative easing, the real impact of the rating shift will be minimal, if anything. Vince Cable, the Business Secretary, yesterday dismissed the loss of Britain’s AAA credit rating as “background noise”
The rating agencies are also facing attacks on their business practices and operating model. Confidence in rating agencies is wavering after alleged ‘rubber stamping’ working practices. The US government has gone as far as to sue Standard & Poor over alleged fraud over faulty credit ratings before the financial crisis. Rating agencies are alleged only to be providing ratings that will be readily accepted by the market, not the true, uncompromising reflections that are really needed.
However, Britain’s downgrade should not come as a shock to anyone. Given the state of the British finances, when compared to Spain, or France, a downgrade on the UK’s AAA rating based on economic fundamentals should not be a surprise.
As far back as December 2011 Bank of France chief, Cristian Noyer, said that compared with France, the UK “has a bigger deficit, as much debt, more inflation, weaker growth and … bank lending is collapsing.”
