… And Then There Were Two

On Friday, Moody’s rating agency downgraded the UK’s credit rating from the coveted AAA to AA1, down one notch. The move came as no big surprise to anybody who follows economic news since the ratings agencies had put the UK rating on a “negative outlook” some months ago. The UK joins the likes of France and the USA to have been evicted from the exclusive AAA club which is now down to just two members, Germany and Canada.

Whilst the decision to downgrade the UK’s credit rating from the highest to one notch down means, in theory, that Moody’s (at least) believe that investing in UK bonds has become a riskier venture, it is unlikely to see a significant change in the cost of borrowing for the UK – as has been the case for the USA. The move is more symbolic and will have more ramifications at the UK domestic political level than on the money markets. The Pound has been weakening in recent months against a resurgent Euro and the US Dollar – in common with these currencies; it has been appreciating against the Yen in response to domestic Japanese economic moves.

On the back of the news, the Pound was trading at a 31 month low against the Greenback and a 16 month low against the Euro, but it has been recovering somewhat since. Sterling has fallen by about 7% against the Dollar this year and slightly more about 7.5% against the Euro. This means that UK exports to the USA and the 17 member Eurozone bloc have become more attractive, but imported raw materials (priced in Dollars) have become dearer. The decline in the value of sterling has more to do with lacklustre economic performance in the UK rather than the ratings cut – UK debt is still one of the safest investments on the planet, according to Moody’s: only German or Canadian bonds would be a modicum more secure, after all.