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Moody's says UK's triple-A credit rating at risk
(Update) The UK's top-notch AAA credit rating is at risk from the eurozone crisis, Moody's, a leading agency, has warned.
(Update with market reaction) The UK's vulnerability to the eurozone crisis was underlined last night when Moody's, a leading credit ratings agency, gave a reminder that the country's prized triple-A status remains at risk.
In its annual report on the UK Moody's said Britain's economy was exposed to both domestic risks and the eurozone sovereign debt crisis. Although the agency described the rating as 'stable' and said the UK's economic management and institutional strength were supportive factors, it said the AAA status was under threat as a result of the threat of shocks from Europe.
'As a result, the outlook on the ratings is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union.'
It added: 'The significant increase in the government's deficit and debt stocks since 2008 has eroded its ability to absorb further macroeconomic or fiscal shocks without rating implications.'
However, markets shrugged off the move, which does not constitute a formal rating announcement. Buoyed by yesterday's positive US and German data and reports of strong demand from banks for loans from the European Central Bank, the pound rose 0.5% to a two-week high of $1.574 against the dollar and versus the euro gained 0.4% to reach a near 12-month high of €1.197.
On bond markets, demand for UK gilts saw 10-year yields fall 0.02% to 2.1%, which is near an all-time low. By contrast, investors sold German bunds and US treasuries, edging their 10-yeaer yields slightly higher at 1.99% and 1.95% respectively.
The FTSE 100, meanwhile, rose 0.7% or 38 points to 5,487 and the FTSE Eurofirst 300 also gained 0.7%, or 7 points, to 983.
Analysts at Evolution Securities commented: 'The UK’s AAA rating may be at risk when Moody’s undertake their re-evaluation of European sovereigns in light of the euro area debt crisis, but otherwise the agency seems to be giving the UK some time to improve its fiscal situation.'
Nevertheless, Moody's comments increase the pressure on chancellor George Osborne, who in his autumn statement last month lengthened to seven years the time the UK will face spending cuts and higher taxes in order to balance the country's books. Any downgrade in the rating would increase UK's borrowing costs and make recovery even harder.
Moody's said: 'It is now clear that the country's weaker economic prospects over the next few years are creating headwinds that are significantly slowing the pace of fiscal consolidation and debt reduction.'
Sarah Carlson, Moody's UK analyst, told the Financial Times: 'We talk about countries having altitude in the AAA ratings space. Cleary the UK's has been substantially reduced.'
The Treasury put a brave face on Moody's comments, striving not to repeat France's fury at similar warnings about its AAA credit rating from Standard & Poor's, Moody's main rival. A spokesman told the Daily Telegraph: 'As Moody's ponts out, the UK is not immune to the problems facing our trading partners in the euro area ... it is important that the euro area continues to take decisive action to fix their problems.'
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