Moody’s Puts Pressure on U.K. as Debt Outlook Turns Negative

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne. Photographer: Jerome Favre/Bloomberg

Moody’s Investors Service said Britain risks losing its top-level credit rating if the economy deteriorates, piling pressure on Chancellor of the Exchequer George Osborne, who said sticking to his budget plan is the only way to prevent a downgrade.

The “primary” driver behind the change to a “negative outlook” for Britain’s Aaa rated debt is a “weaker macroeconomic environment,” Moody’s said in a statement in London late yesterday. Shocks from the euro area’s sovereign debt crisis are also weighing on the U.K., it said.

“The U.K.’s outstanding debt places it amongst the most heavily indebted of its Aaa rated peers, alongside the United States and France, whose Aaa ratings also carry a negative outlook,” the rating company said.

The warning gave Osborne’s Labour Party opponents in Parliament ammunition to attack him for the government’s austerity measures, which they say risk tipping the U.K. into its second recession in less than three years. Osborne seized on comments from Moody’s that “reduced political commitment to fiscal consolidation” would turn today’s warning into a downgrade.

“This is proof that, in the current global situation, Britain cannot waver from dealing with its debts,” Osborne said in an e-mailed statement released by the Treasury. “This is a reality check.”

Pound Falls

The pound fell 0.3 percent to $1.5725 at 7:41 a.m. in London.

Ed Balls, Labour’s Treasury spokesman, said the Moody’s decision showed the danger of setting policy to satisfy ratings companies.

“They’re a weather vane for the direction of thinking,” Balls told BBC Radio 4’s “Today” show. “I fear the world is making the 1930s mistake, and the ratings agencies are partners in this. Today is the first evidence that even the ratings agencies are waking up.”

Osborne says the U.K.’s top credit ratings and low bond yields vindicate his budget cuts, which will see more than 700,000 public-sector jobs axed in the tightest fiscal squeeze since World War II, and set Britain apart from debt-laden euro-region nations including France that have had their credit ratings lowered. His plan seeks to erase the bulk of a budget deficit equal to 9 percent of gross domestic product.

Budget Cuts

Moody’s said additional budget cuts announced in November have reduced the scope for further action, making it harder for the government to meet its goal of eliminating the structural deficit by 2017, a cornerstone of Osborne’s policy goals, if the U.K. is hit by “further abrupt economic or fiscal deterioration.”

The National Institute of Economic and Social Research forecasts the U.K. economy will shrink 0.1 percent this year and grow 2.3 percent in 2013, compared with projections in October for growth of 0.8 percent and 2.6 percent.

Moody’s also said it is less optimistic than Osborne about his plans to start reducing debt after 2015, when it’s due to peak at 95 percent of GDP. The company said debt “will peak later and at a higher level.”

Moody’s also cut the debt ratings of six European countries including Italy, Spain and Portugal yesterday. Spain was downgraded to A3 from A1 with a negative outlook, Italy was downgraded to A3 from A2 with a negative outlook and Portugal was downgraded to Ba3 from Ba2 with a negative outlook, Moody’s said. It also cut the ratings of Slovakia, Slovenia and Malta.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE