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UK Credit Rating Downgraded By Moody's To Aa2 Due To Brexit Concerns

'May is a walking disaster.'

23/09/2017 10:16

Ratings agency Moody’s downgraded Britain’s credit rating on Friday, saying the government’s plans to bring down its heavy debt load had been knocked off course and Brexit would weigh on the economy.

A few hours after Prime Minister Theresa May set out plans for new ties with the European Union, Moody’s cut the rating by a further notch to Aa2, underscoring the economic risks that leaving the bloc poses for the world’s fifth-biggest economy, reports Reuters.

Analysts said the outlook for the UK’s public finances had “weakened significantly” with Brexit likely to put further pressure on the country’s economic strength.

Moody’s said the Government’s plans to fix the public finances were increasingly in question and debt levels are expected to rise, reports the Press Association.

“Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts,” it said in a statement.

“Moody’s believes that the UK government’s decision to leave the EU single market and customs union as of March 29 2019 will be negative for the country’s medium-term economic growth prospects.”

What Does It Mean?

  • A credit rating is essentially a country’s ability to pay back its debts
  • Ratings used by Moody’s go from Aaa (the highest) to C
  • The UK had a Aaa rating from the 1970s right up to 2013
  • The value of Sterling could fall further as investors move money into currencies used by countries with better growth prospects
  • It could make it more expensive for the UK to borrow money
  • It could also mean a rise in interest rates
  • The UK national debt currently stands at just under £2 trillion 

The agency also cut its rating for the Bank of England to Aa2 from Aa1, but revised the UK’s outlook to stable from negative, meaning a further downgrade is not imminent.

Moody’s verdict will be grim reading for May and her finance minister Philip Hammond, who is under pressure to spend more in his budget plan, due in November.

After seven years of austerity, a recent relaxation of a tight public sector pay cap for police and prison workers was likely to be broadened, Moody’s said.

Furthermore, a deal struck by May with a small political party in Northern Ireland after she lost her parliamentary majority in June’s election and the dropping of plans to review costly pension increases would also weigh on the public purse.

“Overall, Moody’s expects spending to be significantly higher than under the government’s current budgetary plans,” Moody’s said.

On the tax side, it noted how the government abandoned a controversial plan to raise national insurance contributions for self-employed workers and was reliant on “highly uncertain revenue gains from tackling tax avoidance to fund tax cuts”.

As a result, the budget deficit was likely to remain at around 3-3.5 percent of GDP in the coming years, higher than the government’s plans to cut it below 1 percent of GDP by 2021/22.

That meant Britain was one of the few big European economies where the public debt ratio was likely to rise, probably peaking at about 93 percent of GDP in 2019, two years later than under the latest government plans.

At the same time, budget pressures would rise as Britain’s economy slowed due to Brexit, with growth of just 1 percent likely next year, down from 1.8 percent in 2017 and not recovering to its historic trend rate over the coming years.

Moody’s said it was no longer confident that Britain would secure a replacement free trade agreement with the EU which substantially mitigated the Brexit hit.

The sheer workload of Brexit in the coming years meant the government would struggle to fix Britain’s weak productivity growth, the Achilles heel of the economy, it said.

Britain’s government said Moody’s move brought it into line with the other major credit ratings agencies, Fitch and Standard & Poor’s.

Moody’s revised up its outlook on the country to stable from negative, meaning a further downgrade is not imminent.

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