Moody’s Downgraded Britain’s Top Rating

On Friday, Moody’s downgraded Britain’s credit rating, marking the first time in history that the country has lost its top triple-A rating from one of the three leading global rating agencies.

Moody’s justified the downgrade of Britain’s rating by one notch, from Aaa to Aa1, citing weak prospects for economic growth in the country, which calls into question the government’s strategy aimed at reducing the budget deficit.

Despite the significant strength of the economy, Britain’s growth will be slowed in the coming years due to weakness in global business activity, particularly in the eurozone, as well as further balancing of the British public and private sectors.

-This period of slow growth poses a challenge for the government’s fiscal consolidation program, which, according to our estimates, could extend beyond the next parliamentary elections,- said Sarah Carlson, a Moody’s analyst.

The Conservative coalition of Prime Minister David Cameron, which came to power in 2010, has aimed to largely eliminate the budget deficit by the 2015 elections, thus implementing austerity policies for years.

The opposition Labour Party immediately stated last night that it is precisely the policy of excessive budget austerity that has led to the downgrade.

-This downgrade of the credit rating is a humiliating blow for the Prime Minister and the Chancellor of the Exchequer, who once stated that maintaining the AAA rating would be a test of their economic and political credibility,- said Ed Balls, the Labour Party’s spokesman on financial matters.

Chancellor George Osborne quickly responded, stating that following Moody’s decision, the government will double its efforts to implement its economic recovery plan.

-This is a clear reminder of the debt problems our country faces and the clearest possible warning to anyone who thinks they can escape addressing these issues,- Osborne stated last night in a press release.

It is comforting for the government that Moody’s has kept the outlook for Britain’s rating stable, which means that there will likely be no further rating changes in the next year.

However, the downgrade will make it more difficult for the government to achieve its budgetary goals as it could increase the costs of government borrowing.

Shortly after Moody’s announcement, the exchange rate of the British pound fell from 1.5250 to 1.5160 dollars, not far from its lowest level in two and a half years, and further weakening is expected.

-This is quite a significant blow. So far, we haven’t seen a large reaction in the pound’s exchange rate in the currency markets, as it is late and the markets are closing. However, more aggressive selling of the pound can be expected on Monday morning as soon as the Asian markets open,- said Kathy Lien, a director at BK Asset Management in New York, last night.

Britain has held a top triple-A credit rating from Moody’s and S&P since 1978, and from Fitch since 1994. However, all three agencies downgraded the outlook for Britain’s rating to negative last year, which means that the other two agencies could also downgrade its rating.