Tuesday

31st May 2016

UK downgrade rounds off EU's Black Friday

Rating agency Moody's stripped the UK of its coveted AAA credit rating on Friday (22 February), rounding off a day of economic gloom in the EU.

In a statement released shortly before the closure of the markets, Moody's said that the downgrade was the result of "continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade".

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  • Britain's credit rating has been cut for the first time since 1978 (Photo: MyTudut)

It is the first time Moody's has downgraded the UK's creditworthiness since its ratings system was set up in 1978. Meanwhile, the two other big rating agencies - Standard & Poor's and Fitch - are yet to cast their verdict ahead of the country's next annual budget on March 20.

The downgrade leaves just six EU countries - Denmark, Finland, Germany, Luxembourg, the Netherlands and Sweden - with AAA ratings.

The UK's credit rating has been under pressure for several years as the country struggles to recover from the damage caused by the 2007-9 financial crisis.

It managed 0 percent growth in 2012 and the European Commission has forecast a 0.9 percent increase in output over the course of 2013. Among the 27 EU countries, only Spain, Ireland and Greece ran a budget deficit higher than the UK's projected 6.3 percent shortfall in 2012. Meanwhile, the UK's debt pile is expected to clear 95 percent in 2013.

The news is a big blow to the Conservative-led Coalition government and, in particular, Chancellor George Osborne. Osborne had staked his political reputation on protecting the UK's triple AAA status.

Responding to the news, Osborne said that the downgrade was a "stark reminder of the debt problems facing our country". He added that the government would continue "delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs."

The downgrade came at the end of a day of dismal economic news, following the morning publication of the European Commission's Winter Forecast. The EU executive expects the eurozone to remain in recession in 2013 with economic output falling by a further 0.3 percent over the course of the year.

There was, however, a crumb of comfort as Moody's also revised the UK's economic outlook from 'negative' to 'stable', praising what it described as the country's "significant credit strengths."

Moreover, the downgrade is more likely to be a symbolic blow and is not expected to have a significant effect on UK borrowing rates.

UK spreads on ten-year government bonds, which had fallen to historic lows over the past two years as investors have searched for safe investment havens outside the eurozone, currently stand at 2 percent, around 0.5 percent higher than those of German Bunds.

Finance ministers baulk at tax-avoidance rules

Member states will discuss again in June a proposed directive to outlaw practices used by large companies to avoid paying taxes. Meanwhile, the European Parliament makes progress on its probe of Panama Papers.

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