UK Avoids Credit Downgrade

by Jason Gorringe, Tax-News.com, London

24 September 2010

Credit ratings agency Moody’s has endorsed UK fiscal policy in maintaining the country's triple-A credit rating with a stable outlook, but it warned that medium-term risks to the rating remain.

Moody’s said that despite a weak post-crisis balance sheet and challenging economic outlook, the UK is able to meet these challenges whilst maintaining its top credit rating.

The report is being considered by analysts and the market as a glowing endorsement of the coalition government's fiscal policies, including new tax and spending measures announced in June's emergency budget which have kick-started the painful process of narrowing the record post-war budget deficit at a much faster rate than budgeted for by the previous administration.

Moody's said the rating was based on the assumption that the government would be successful in "stabilizing and eventually reversing" deterioration in its fiscal strength.

The agency urged the government to continue to place the reduction of the budget deficit as its “utmost priority”, but also warned that a slowdown in the country’s economy could affect the UK’s borrowing risk, and could trigger a downgrade. Nonetheless, Moody’s said that “the UK economy appears sufficiently flexible and robust to grow moderately, even in the face of.. austere fiscal consolidation.”

Credit ratings help determine lending risk. A downgrade for the UK would have had a significant detrimental effect on UK borrowing costs. The UK has been able to achieve a triple-A long-term debt rating since 1978.

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