Moody's Axes Britain's AAA Debt Rating in Blow to Chancellor George Osborne

Moody's Investors Service has cut Britain's AAA debt rating for the first time ever in a crucial blow to Chancellor George Osborne just weeks before his make-or-break budget statement.

Moody's cut the rating one notch to Aa1, the company said in a statement published Friday on its website, the first of the three major ratings agencies to lower the coveted triple-A grade following slower than expect economic growth, a rising budget deficit and higher overall borrowing from the Conservative led coalition government. Moody's had warned of a potential downgrade on 13 February of last year.

"The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, 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," said Moody's. "The sluggish growth environment in turn poses an increasing challenge to the government's fiscal consolidation efforts, which represents the second driver informing Moody's one-notch downgrade of the UK's sovereign rating."

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Moody's also cut the debt rating of the Bank of England by one notch to Aa1 from AAA.

Osborne, who had said from the outset of his term as Chancellor that Britain's coveted triple-A debt rating needed to be defended at all costs, was defiant upon hearing of the historic downgrade.

"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," said Osborne in a Treasury statement. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."

The Chancellor's 2013 Budget Statement is scheduled for Wednesday 20 March.

Moody's also referenced the Chancellor's recent admission that his pledge to lower overall government debt, as a proportion of GDP, would need to be extended into the next parliament.

"Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks," the ratings firm said. "For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy."

The European Commission said Friday in its Winter Economic Forecast that its expects Britain's budget deficit to widen to 7 percent of GDP in 2013/2014 financial year and sees overall government debt rising to a record 97.1 percent of GDP by the 2014/2015 financial year.

"While the UK government sticks to its fiscal consolidation strategy, borrowing in the financial year to-date is higher than in the previous year mainly due to weak corporate tax receipts, linked to the temporary closure of the biggest oil field," the Commission said.

Britain's Office for Budget Responsibility, a non-partisan watchdog of the nation's public finances, said in December that it expects UK GDP to grow 1.2 percent this year, 2 percent in 2014 and 2.3 percent in 2015. The International Monetary Fund downgraded its forecast for UK GDP last month in its latest World Economic Outlook and now expects growth of 1 percent this year and 1.9 percent in 2014.

Benchmark UK government bonds, known as gilts, closed trading at around 2.10 percent Friday and have risen around 50 basis points, or 0.5 percent, since August. Bond prices and bond yields move in opposite directions.

Sterling fell to $1.5230 against the US dollar this week, the lowest in nearly three years, as the Bank of England appeared divided on the issue of deeper stimulus for the moribund economy and Governor Mervyn King was outvoted by his colleagues in an effort to add to the Bank's ?375m programme of quantitative easing.

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Source: http://www.ibtimes.co.uk/articles/438502/20130222/moody-s-aaa-rating-cut-george-osborne.htm

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