1. Continued weakness in the UK’s medium-term growth outlook due to the anticipated slow growth of the global economy, and the drag on the UK economy from the ongoing domestic public- and private-deleveraging process. Moody’s expects sluggish growth to continue until the second half of the decade
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation: a consolidation that now will extend well into the next parliament where Moody’s expects UK gross general government debt level, will peak at just over 96% of GDP in 2016 (excluding the effect from transferring the coupon payments from the Asset Purchase Facility - an effect of roughly 3.7 % of GDP in total).
3. As a result of the UK’s high and rising debt burden, deterioration in the shock-absorbing capacity of the government balance sheet. Moody’s believes that the mounting debt levels in a low-growth environment have impaired the UK’s ability to contain and quickly reverse the impact of adverse economic or financial shocks
Moody’s does not expect further additional material deterioration in the UK’s prospects, or additional difficulties in implementing fiscal consolidation. Therefore, they have put the Aa1 rating on stable signalling - no changes in the rating over the next 12-18 months . They do, however, signal downward pressure on the rating should the current government policies be unable to stabilize and ease the UK’s debt burden or, in the event of additional material deterioration in economic prospects or reduced commitment to fiscal consolidation
Downgrade of more political than economic importance
Once again, Moody’s is the first mover in to alter Britain’s credit rating. Back in February 2012, Moody’s was the first agency to put the UK on a negative outlook, with Fitch following in March 2012 and S&P in Dec 2012. For some time now, rating actions from the international agencies have been anticipated as the poor UK recovery is by no means a new story. Neither do we expect any structural market reaction on the back of this downgrade. On the back of Moody’s release Friday, Sterling fell to a two-year low against USD in the final minutes of US trading session - but this is on the back of a 5.5% weakening in trade weighted terms in the first two months of 2013. As we previously highlighted, the Sterling is in a perfect storm with the combination of a weaker USD, risk of further easing by the BoE and a dismal growth outlook to weigh on the GBP. Alongside the outlook of inflation remaining elevated for the next two years, there are plenty of reasons for the Sterling to weaken other than the downgrade.
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