Last Friday Moody’s Investors Service announced its downgrade of the United Kingdom’s government bond ratings by one notch, from AAA to Aa1, a move that was anticipated a year ago when the credit rating agency moved its rating on U.K. bonds from “stable” to “negative.” The other two major credit rating agencies, Standard and Poor’s and Fitch Ratings each have a negative rating on the U.K.’s bonds and are expected to issue similar downgrades in March.
The primary reason is England’s continued sluggish growth as a result of the worldwide recession triggered in 2007. For the nine months ending in September, the British economy showed some slight signs of life but turned down again in the last quarter, suggesting to some that the economy could suffer a “triple dip” recession in 2013. And despite verbal assurances from Britain’s Chancellor of the Exchequer George Osborne back in 2010 that his program of austerity could be counted upon to lift the economy within a few years, Moody’s now says such optimism is unwarranted. Wrote Moody’s, the primary reason for the downgrade was "the continuing weakness in the UK’s medium-term outlook, with a period of sluggish growth which Moody’s now expects will extend into the second half of the decade."
Such modest austerity as Osborne was able to accomplish, which included raising taxes further on England’s wealthiest citizens and expanding “infrastructure spending” to stimulate job growth, has had precious little positive impact so far and, as a consequence, a “deterioration … of the government’s balance sheet … is unlikely to reverse before 2016.”
It could be worse. Public perception, especially by bondholders, remains surprisingly positive, as evidenced by the nearly invisible reaction of the bond market to Friday’s announcement, and the average maturity of the government’s bond remaining at about 15 years. As Moody’s noted, "The UK’s creditworthiness remains extremely high … with supportive domestic demand for government debt, the longest average maturity structure among all highly rated sovereigns globally."
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