Moody’s Investors Service said it downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa.
The rating agency said the stable outlook on the UK’s Aa1 sovereign rating reflects Moody’s expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK’s debt trajectory.
Moody’s said key interrelated drivers of the action are:
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation program, which will now extend well into the next parliament;
3. And, as a consequence of the UK’s high and rising debt burden, deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.
At the same time, Moody’s explains that the UK’s creditworthiness remains extremely high, rated at Aa1, because of the country’s significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favorable debt structure, with supportive domestic demand for government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.
Moody’s said, although the UK’s economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK’s independent monetary policy framework and sterling’s global reserve currency status.
To read the full Moody’s news release click here.