Huffington Post – December 20, 2011
Moody’s, the credit rating agency, has warned that the UK’s Aaa rating would be under threat in the event of further economic shocks.
In its annual credit report on the UK, Moody’s said that the country’s top rating is based on its structural strengths – long-term economic fundamentals, strong institutions and government finances and low susceptibility to external events.
The flexibility of the pound and the independent central bank mean that the UK is able to respond to economic shocks, and the long maturity of the country’s debt both underpin the rating.
However, the agency said, “the UK faces formidable and rising challenges. Its near-term macroeconomic outlook has weakened, and this will likely slow the pace of its fiscal consolidation. The significant increase in the government’s deficit and debt stock since 2008 has eroded its ability to absorb further macroeconomic or fiscal shocks without rating implications.”
The stable outlook attached to the rating is predicated on the government sticking to its deficit reduction programme. If the economy slips further, or if the government has to step in to bail out financial institutions, these efforts are likely to be derailed.
With both the overall economy and the banking sector heavily exposed to the eurozone, the future of the rating is dependent on whether or not some resolution is found for the sovereign debt crisis on the periphery of the single currency area.
Although countries outside the eurozone “can be expected to be somewhat cushioned from both the euro area sovereign debt crisis and its rating consequences”, the agency said “no EU sovereign rating can be considered immune to this crisis.”
Earlier on Tuesday, Bank of England deputy governor Charlie Bean said that the institution was making preparations to support UK banks in the event that the single currency area did break up.
“I don’t want to put probabilities on it breaking up, but it is clearly a worrying situation,” he told the BBC.