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AAA Q&A: why the UK's rating downgrade matters

Moody’s decision to strip the UK’s of its prized AAA credit rating late last Friday has huge political, economic and investment significance.


by Gavin Lumsden, Chris Marshall on Feb 25, 2013 at 11:30

AAA Q&A: why the UK's rating downgrade matters

What has Moody’s done?

Moody’s, one of the world’s three leading credit ratings agencies, has cut the UK’s government bond rating from a top AAA rating to AA1.

The agency warned it was thinking of downgrading the UK a year ago so the move is not a shock although the timing was a nasty surprise for the chancellor George Osborne.

The chancellor pinned the government’s austerity programme on cutting the country’s debts and preserving the AAA rating. Coming a month before his budget, Moody’s is effectively saying there is nothing Osborne can do in the short term to improve the UK’s financial situation.

Although the one-notch move is not huge in itself, it is the first time the UK has lost its top credit rating. The other agencies Standard & Poor’s and Fitch still have the UK on AAA although they have previously said they are considering a cut like Moody’s.

Next: Why is Moody’s concerned?

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14 comments so far. Why not have your say?

John C

Feb 25, 2013 at 13:48

As someone once said, who rates Moody's and who pays them?

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Clovis Bassington

Feb 25, 2013 at 14:26

Not good, not good at all, however the impact may not be that great as it was expected and perhaps overdue. After all, the deficit reduction programme has been half-hearted (and this will not make it easier). Less forgivable failures are the lack of supply side reforms, meaningful cuts in plutocracy or abolition of capital taxes that raise no money.

Frankly, Osborne has underperformed, but the bigger failure is Cable’s. If his role has to remain a Lib Dem fief, then Laws or Alexander should take over. Otherwise give the Lib Dems something else, Libraries or the Post Office or something and get a Tory who understands business in there.

For a coalition effort, it’s not been too bad and a certainly lot better than if Balls and Miliband had been in control. If they had been, we would be staring at B!

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Feb 25, 2013 at 14:36

Apparently, the UK lost its AAA credit rating in, let's get the facts right, Gavin and Chris ;)

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Tom Mackay

Feb 25, 2013 at 14:38

If you are running a company and it starts to lose money you don't just stop spending but rather you manage your resources and change your priorities etc. Cameron and Osborne are boys in charge of the ship. Milliband I would put in the same camp and while we may have issues with Balls he does seem to have a better grasp of the need for management.

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wayne roberts

Feb 25, 2013 at 15:36

Even if the UK got a C Osborne would still stick to his plan, not quite enough people suffering for him yet, by the way some rooms in council houses have 4ft of empty space above peoples heads which works out at about 25% of unused space in council houses is being paid for by the government but not being used so there is a possibility of saving even more money from the poor by taking 25% off their housing benefits for that unused space. This is how the government that is running the 5th largest economy in the world plans on making it prosperous again, I'd give them a D.

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Feb 25, 2013 at 15:39

I am The Micky Mouse rating agency. I have downgraded Moody's to CC1 and all the rest of them will get same treatment if they just do a copy cat thing.

Actually, Who cares? Markets love rumour and silly stories in order to fiddle and make even more money. Which leads me to inquire, who makes trillions out of all this nonsense? Is it those naughty hedge funds and greedy bankers and all the rest of the rotten lot twisting, bending the facts and laws to shovel more money in to their bulging pockets?

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Mike R

Feb 25, 2013 at 16:48

As has been said- Moody's makes money and has clients who pay them. The news Moody's impart is not "News" but it is part of a trigger for those betting in the Financial markets. The FX perhaps now being one of the front runners in this style of betting and speculation. Europe has of late experienced this with Bond Markets.

But a weak currency which is not controlled and unstable, may not assist exports. But may influence and be counterproductive to other aspects of the UK economy. The affects of the latest drop in the Pound against the Dollar/Euro have yet to filter through in Higher Import and Fuel prices, amongst other things.

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Anonymous 1 needed this 'off the record'

Feb 25, 2013 at 17:05

Good article, thank you...... Moody's has got it right, UK well..... a sinking ship..... not much can be done except lower the standard of living of the average person until we can again compete in the world markets, and the Government is doing that......

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Feb 25, 2013 at 18:11

With the drop in Sterling our GDP as measured by the rest of the World has fallen by the same amount. Given that we had years of false GDP increases driven by ever increasing credit, then as this credit is withdrawn one would expect a big drop in GDP. And this drop should be more than the extra created by the false boom, as people start to repay their debts.

So, in Sterling terms GDP has held up surprisingly well. Of course the media, Milliband & Balls do not understand this and call the slight drop in GDP a "recession" when it is just a part correction.

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Clive B

Feb 25, 2013 at 18:23

It's about time we stopped mucking about with so-called "austerity" (isn't our national debt still increasing ?) and started living within our means.

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Rathin Gupta

Feb 25, 2013 at 18:28

Here it goes;

Political impact : definitely some; general election is still some 2 years away; this may not be significant unless the economy fails to pick up some what.

Economic Impact : probably none, difficult to quantify.

Investment impact : very doubtful as the Gilt buyers don't take much notice of the Rating Agencies.They have their own methods to establish which countries are a safe bet.

New Chancellor : we urgently need one who can instill confidence & inspire the nation.

This article : in -coherent , rambling & deserves 5/10

Rating Agencies : abandon them; where were they during mortgage miss-selling & recent financial crisis etc.

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Feb 25, 2013 at 21:44

Rather like media coverage of most events. Much ado over nothing. There never was a quick fix to the UK's problems. Why do "we" consider ourselves to be superior beings. Consumer debt after years of lax lending for property is the millstone around the UK's neck.

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Mike R

Feb 25, 2013 at 21:56

well never mind - the scene has changed. In the space of a few hours. The pound is up and the Euro is down. Markets are back to worrying about Europe.

Is Bunga Bunga Berlusconi back ???

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Feb 25, 2013 at 22:31

QE is really just a way for the government to fund its deficit. As it allows them to borrow money at a very low interest rate. QE is also like an additional tax on savers, it devalues their money through monetary inflation. The Bank of England have denied this stating they were going to pay back the money once the economy had recovered, in their heart they must have known they were never going to pay it back.

Printing money has never solved an nations problems but it is something politicians are attracted to as it allows them to keep spending money they don't have. We are surely now just witnessing the decline of our nation.

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