Moody’s threatens UK with downgrade

Ratings agency Moody’s has cast a new shadow over the eurozone by downgrading a host of nations and placing the UK and France on downgrade watch.

Just a day after Greece approved tough austerity measures to avoid default, the ratings agency changed its outlook on the UK’s AAA-rating to negative on fears it will get dragged deeper into the eurozone crisis.

Moody’s said: ‘The increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks skewed to the downside. Any further abrupt economic or fiscal deterioration would put into question the government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16.’

It added: ‘Although the UK is outside the euro area, the high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure on the UK's Aaa rating given the country's trade and financial links with the euro area. Overall, Moody's believes that the considerable uncertainty over the prospects for institutional reform in the euro area and the region's weak macroeconomic outlook will continue to weigh on already fragile market confidence across Europe.’

‘Moreover while the UK currently enjoys 'safe haven' status, there is also a growing risk that the weaker macroeconomic outlook could damage market confidence in the government's fiscal consolidation programme and cause funding costs to rise.’

Moody’s has also downgraded its outlook on France’s Aaa-rating to negative on the basis of uncertainty over the prospects for institutional reform in the euro area and the weak macroeconomic outlook across the region, which will continue to weigh on already 'fragile' market confidence.

‘The ongoing deterioration in France's government debt metrics are now among the weakest of France's Aaa-rated peers,’ Moody’s said. ‘The significant risks to the French government's ability to achieve its fiscal consolidation targets could be further complicated by a need to support other European sovereigns or its own banking system.’

Meanwhile Moody’s downgraded Spain from A1 to A3, Italy from A3 to A2 and Portugal from Ba2 to Ba3 and put all three nations on a negative outlook. It also cut the ratings on Slovakia, Slovenia and Malta.

The downgrades come a month after S&P cut its ratings on nine Eurozone nations.

‘Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programs and the structural reforms that are needed to promote competitiveness,’ Moody’s warned.