The UK has finally lost its foothold among the rapidly dwindling band of triple – A – rated countries.  At the end of February, credit rating agency Moody’s reduced the UK’s sovereign debt rating by one level – from AAA to AA1 – relegating the UK to the second tier for the first time since 1978.

In its announcement, Moody’s cited “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”.

Although this seems like headline news, it had been expected for a little while.  The coalition government is taking longer than expected to reduce the UK’s sizable deficit and all three leading credit rating agencies – Fitch, Moody’s and Standard & Poor’s – had already placed the UK on a “negative” outlook during 2012, stoking expectations of a downgrade.

Credit ratings are used to provide an indication of a government’s capacity to repay its debts but any concerns the downgrade might lead to a rise in the borrowing costs for the UK appear overplayed – at least if the recent experiences of the US and France are any indication. The US lost its AAA status in August 2011 and France was downgraded in November 2012.  Far from triggering a catastrophe, the borrowing costs of both nations have actually gone down since their respective downgrades while their stockmarkets  have risen significantly.

The implications of the UK’s downgrade are likely to prove more political than economic.  Moody’s announcement highlighted the challenges that “subdued medium – term growth prospects pose to the government’s fiscal consolidation programme” and the coalition government continues to face substantial challenges in its attempts to reduce the UK’s debt levels.  Politicians have typically tried to placed considerable value on the UK’s top credit rating – indeed, in the Conservative Party’s manifesto of spring 2010, George Osborne pledged to “safeguard Britain’s credit rating”.

The news of the downgrade will put more pressure on the Chancellor of the Exchequer than on the economy itself.  On balance, a drop in the UK’s credit rating is likely to make little difference to the fundamental performance or health of the country’s economy. Although Moody’s decision highlights the challenges faced by the government, the downgrade itself is likely to represent a symptom of the existing problems rather than a catalyst for fresh trouble.

February 2013