UK's loss of AAA rating sends pound into downward spiral

Feb 25, 2013

But commentators say Moody's downgrade will affect Osborne's reputation more than ailing UK economy

THE POUND has tumbled after the UK lost its AAA credit rating for the first time since 1978, but the real impact of the downgrade will be felt by politicians rather than the economy, commentators say.

Sterling endured a "dire weekend", slumping to its lowest level against the US dollar in two-and-a-half years in the aftermath of the downgrade, the Wall Street Journal reports. It was at its lowest level against the euro for 16 months this morning.

But the decision by Moody's to move the UK to an Aa1 rating is primarily a moment of "political significance" that will raise difficult questions about the "credibility" of Chancellor George Osborne, writes the BBC's chief economics correspondent, Hugh Pym.

Most commentators said a downgrade was widely anticipated by financial markets, although the timing of the Moody's decision caught some by surprise. It was believed that ratings agencies might hold fire until after the government's 20 March Budget.

Business Secretary Vince Cable moved quickly to reassure markets that the loss of the AAA rating was "largely symbolic", saying there were "positive signs" for the economy. But Labour described the downgrade as a "humiliation" for the coalition and said ministers must change course.

Pym disagrees saying there is "no shame" in the UK losing its gold-plated AAA rating at a time when "most leading economies are struggling with the burden of rising debt and lack of growth". He points out that the US and France suffered a similar fate in 2011 and it was only a matter of time before the UK followed suit.

But Pym says the downgrade will trigger a debate about Osborne's reputation because the Chancellor "set great store" by retaining the top agency rating when he took the reins of the Treasury. Having it "stripped away" is certain to embolden critics and political opponents who say he's lost control of the weak British economy.

The website Politicus disagrees, arguing that the downgrade might actually help the ailing economy and is unlikely to derail Osborne's austerity programme. While long-term borrowing costs will increase "slightly", Politicus says the fact the UK has been downgraded well after the US and other G7 nations suffered a similar fate suggests the "UK doesn't look in too bad shape".

Those who want Osborne to do "a U-turn", and give the economy some fiscal stimulus, cannot take comfort from the Moody's downgrade, says Politicus. The ratings agency's position is that the UK needs to get its debt under firmer control – "lndeed, it is telling the Chancellor to stick to his plan of getting the books back into balance, and indeed to speed up the process if he can".

Sign up for our daily newsletter

Read more: