It’s no surprise but it’s still something of a shock: Moody’s have downgraded the UK’s credit-rating from AAA to Aa1. They explain their decision in full here, but, really, it’s just as you’d expect. The UK’s stuttering recovery – and the way it has upset George Osborne’s best-laid plans for reducing the deficit – means that they’ve now got less confidence in our creditworthiness.
The really important question now is what this means economically – and, here, there is cause for hope. I’ve highlighted a Bloomberg study before now which suggests that the markets aren’t paying much heed to the rating agencies. To quote: “In about 47 per cent of cases, countries’ borrowing costs fall when a rating action suggests they should climb, or they increase even as a change signals a decline.” The implication is that, when the whole world’s doing badly, investors don’t suddenly hurry away from those countries – such as America – that are basically trustworthy, downgrade or no’. They still regard the old safe havens as the new safe havens.
Will the UK fall into that bracket? Moody’s statement seems optimistic in that respect. It highlights that “the UK’s creditworthiness remains extremely high, rated at Aa1, because of the country’s significant credit strengths”. And, significantly, it adds that:
“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.”
That said, there is a more pessimistic account of what this downgrade means – and it’s one that ConHome regular Andrew Lilico told superbly in the Telegraph a couple of days ago. I won’t spoil his article here, expect to say that it ends with a warning that “the ways forward may be bank collapse and deflation, or even more QE and even more inflation.” Joy.
As for what this downgrade means politically, there’s no denying the truth: it’s terrible for George Osborne. All along, the Chancellor has pointed to our triple-A rating as ultimate proof that he has the right plan and that it’s working. But now he only has that Aa1 to point towards – at least in the case of Moody’s rating – that argument is going to be harder to sustain. And all with a Budget coming up, too. That sound you can hear is Ed Balls cackling with glee.
P.S. A year ago, over at Coffee House, I explained why Labour’s fiscal plan would have cost us our triple-A rating too.