UK credit rating could be downgraded

25-11-2019

Moody’s cites Brexit-related ‘policy-making paralysis’ as it lowers its outlook for economy

The UK’s credit rating could be downgraded after ratings agency Moody’s lowered its outlook for the economy amid ongoing Brexit paralysis.

In what Reuters described as a “toughly-worded statement”, the rating agency changed the outlook on the UK’s current marker of how likely it is to pay back its debts from “stable” to “negative” citing “deep divisions within society and the political landscape” which are reducing the UK’s ability to make policy decisions.

“The increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process has illustrated how the capability and predictability that has traditionally distinguished the UK’s institutional framework has diminished,” Moody’s said in its report, adding that the decline in “institutional strength” is “likely to survive Brexit”.

The Financial Times says the move comes “a little more than a week after lawmakers backed Prime Minister Boris Johnson’s call for a general election next month, in the hope of breaking the gridlock over his plan for the UK to leave the EU”.

While Moody’s said it still sees positives in the economy such as a broad range of economic activity, a sound monetary policy framework and a highly flexible labour market, the change in outlook “implies a cut to the actual rating could be coming imminently”, Sky News reports.

Moody's stripped Britain of its top-notch AAA rating in 2013, before downgrading it again in 2017 to Aa2, the third highest grade. Concerns over continued paralysis over Brexit or a protracted departure from the EU could see the UK’s credit rating downgraded for the third time in six years.

This grade, which is an assessment of a country’s credit-worthiness, is hugely important because it can affect the amount that it costs countries to borrow money.

Both Labour and the Conservatives have promised to use record low interest rates to increase borrowing to fund a massive public spending spree.

Concerned that the UK’s debt levels, currently sitting at £1.8trn - more than 80% of annual economic output, could rise as a result, “Moody's change in outlook suggests this could alter in the future,” says the BBC.

“A downgrade would be of slightly less sensitivity than under the era of George Osborne who pledged to maintain Britain's then AAA rating,” says Sky News, “but a further reduction would nonetheless prove embarrassing for the Conservative Party”.

City A.M. says it would “be a blow for Sajid Javid just a day after the Chancellor announced new fiscal rules with the goal of keeping public finances in check after the general election”.

“For some in the City, these reports can be easily dismissed,” writes BBC business reporter Katie Prescott. “But the language and timing of this (long-scheduled) report are sobering, coming as it has when politicians are looking to splash out, making big promises about the future of the UK’s public services”.

Moody’s report ends by warning a downgrade would happen if policy makers fail to implement a credible strategy to cut debt, “and cutting debt doesn't seem to be on anyone's manifesto”, says Prescott.

Source: The Week