Moody’s to Assess U.K.’s Aaa Rating in 2013 as Economy Slows
The U.K.’s top Aaa rating will be assessed at the beginning of next year as the nation’s economy slows amid government efforts to reduce deficits and Europe’s debt crisis, according to Moody’s Investors Service.
The economic recovery in the U.K. is likely to be slower than forecast as the private and public sectors reduce their debt loads, Moody’s said late yesterday in a report. The government’s Autumn Statement, scheduled to be released in December, may reveal “the likely speed of fiscal consolidation, the growth outlook and, most importantly, the assurances offered that the debt trajectory will stabilize and start to decline within the rating horizon,” Moody’s said.
The negative outlook “is driven by in part concern that the government’s efforts to achieve fiscal consolidation and reduce debt are being hampered by weaker than expected economic prospects,” Sarah Carlson, a London-based analyst at Moody’s, said in a telephone interview. It also considers “the risks posed by the ongoing euro-area sovereign debt crisis,” she said.
Britain’s economy is forecast to shrink 0.3 percent this year and expand 1.1 percent in 2013, according to the median estimate of economists surveyed by Bloomberg. Bank of England Governor Mervyn King said yesterday the “road to recovery will be long and winding.”
The rating company also said the political environment will inform its analysis. Chancellor of the Exchequer George Osborne, who will present his economic statement to Parliament on Dec. 5, has affirmed his commitment to his fiscal squeeze. The opposition Labour Party has called for a slower pace of spending cuts to protect growth. The next general election must be held by 2015.
“The political appetite for significant additional expenditure cuts in the parliament is likely to be very limited,” the report said. “This suggests that, while the U.K.’s track record of reversing increases in debt is likely to continue going forward, the timing of these reversals is more uncertain than it was previously, with consolidation likely to be delayed due to the political cycle and more challenging macroeconomic conditions.”
Moody’s issued its negative outlook for U.K. debt on Feb. 13, prompting King to say later that month that the action had “no impact on the yield that people in the market were willing to lend to the U.K. government at.”
“I don’t think we should be slaves to the ratings agencies,” King told lawmakers on Feb. 29.
U.K. government bonds were little changed today, with the yield on the 10-year gilt at 1.75 percent.
Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for Standard & Poor’s. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.
Moody’s said on Sept. 11 it may join S&P in downgrading the U.S. to Aa1 from Aaa unless Congress next year reduces the percentage of debt-to-gross-domestic-product during budget negotiations.
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