Britain loses AAA rating in Moody's downgrade

WASHINGTON - Agence France-Presse

A red double-decker bus drives past the Bank of England in London on February 22, 2013. Rating agency Moody's cut Britain's debt rating by one notch from the top-grade AAA to Aa1, citing slow growth and a rising debt burden. AFP photo

Moody's stripped Britain of its triple-A debt rating Friday, saying government debt was still mounting and that growth was too weak to reverse the trend before 2016.

In an expected rebuff to the Cameron government's hopes that sharp spending cuts would both reduce its deficit and give growth a boost, the rating agency cut Britain's grade by one notch to Aa1.

In parallel, it lowered the rating of the country's central bank, the Bank of England, which also fell from AAA to Aa1.

The move sent the pound tumbling and put the architect of British austerity, finance minister George Osborne, on the defensive.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said after the Moody's announcement.

"We are not going to run away from our problems, we are going to overcome them." The main driver for the downgrade, Moody's said, "is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years." It described the British economy as constrained both by turgid global growth and the drag from businesses and the government rapidly slashing their debt burdens.

"It's a combination of things. But mostly there is both a public and a private deleveraging process going on, and that has certainly curtailed growth," Sarah Carlson, Moody's lead analyst for the UK, told AFP.

In turn, slow growth makes it harder for the government to shrink its deficit and balance its budget -- and so debt will continue to grow, Moody's said.

"The debt trajectory is unlikely to reverse before 2016," Carlson said.

Osborne said the downgrade underscored the challenge the country faces rebounding from recession. "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," the finance minister said in a statement.
 
"We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs." The downgrade came three months after Moody's removed France's AAA rating, as the continuing European crisis humbles what were once the world's most solid economies.

But while France has resisted deep cuts to spending to balance its books -- and instead moved to raise taxes on the wealthy -- London has opted for a course of austerity.

Carlson said that the eurozone recession has "adversely affected" Britain's recovery, but that the slowdown in spending and investment by both government and business have been the central factor.

London had hopes that a sharp rise in tax revenues would help wean it from its fiscal consolidation program, Moody's said.

But due to slow growth, deficit containment will lag and the country's debt load will continue to mount until 2016, when it will peak at around 96 percent of GDP, more than one year later than the government forecast.

"While the government's recent Funding for Lending Scheme has the potential to support a surge in growth, Moody's believes the risks to the growth outlook remain skewed to the downside," it said.

Moody's nevertheless placed Britain on a stable outlook, guardedly confident that political will combined with some medium-term fundamental economic strengths will "in time" support London's deficit-cutting efforts and reverse its debt trajectory.

Britain remains "a highly competitive, well-diversified economy (and has) a strong track record of fiscal consolidation and a robust institutional structure," Moody's said.

The downgrade knocked the pound 0.8 percent lower, to $1.5131. The pound has lost about 6.8 percent since the beginning of the year as doubts have grown over government policies.

Economist Howard Archer of IHS Global Insight said the long-expected downgrade will otherwise have little impact.

"The markets have been increasingly pricing in the loss of the UK's AAA rating for some time," he said.
 Even so, he added, it "is an embarrassment for the government, which will undoubtedly be seized upon by its critics and opponents. And it does focus attention on the UK economy's extended and ongoing serious problems."