By: Dr. Mike Campbell
The UK government opted not to join the single currency adventure with its European partners and so it is insulated, to a first approximation, from the sovereign debt crisis in the Eurozone. However, in common with most developed nations, the UK has its own public debt mountain, currently estimated at £1 trillion; about 65% of the nation’s GDP. The UK has embarked on its own austerity drive which aims to curb the national deficit problem, reversing a 5% deficit by the end of the current parliament. The plans were broadly welcomed in financial circles and have been vaunted by the coalition government as reasons why Britain’s borrowing costs have been kept low and the credit rating has remained top-notch.
Ratings agency Moody’s has just thrown a spanner into the works by determining that the UK’s credit rating outlook had moved from stable to negative. This implies that within the next 18 months, the UK stands roughly a one-in-three chance of losing its triple A credit rating. Should the rating slip then the cost of borrowing to the UK exchequer would be likely to increase if other agencies adopted a similar view. However, Moody’s did offer a crumb of comfort to the UK by endorsing the government’s austerity measures: “the government is implementing an ambitious fiscal consolidation programme”, and Moody’s complimented the UK on ‘its commitment to restoring a sustainable debt position’.
The UK was not alone in feeling Moody’s hot breath on their neck. The move had been prompted by concerns over weak growth in Europe which could hamper needed economic reforms and austerity measures. Moody’s placed France and Austria on negative outlook and reduced the credit ratings of Spain (A1 to A3); Italy (A2 to A3); Portugal (Ba2 to Ba3); Slovakia, Malta and Slovenia also saw ratings cuts. Given that the USA and Japan both have severe debt problems and low growth, perhaps US-based Moody’s will shortly be turning their gaze in their directions, or then again, perhaps not.