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UK's AAA downgrade: why the ratings agencies are best ignored

by Sarah Miloudi on Feb 25, 2013 at 07:55

UK's AAA downgrade: why the ratings agencies are best ignored

The pound is set to pull back further following Moody's decision to strip the UK of its prized AAA rating.

Although the downgrade to Aa1 came as little surprise given Britain's weak growth and huge debt burden, sterling, which has already been under pressure, is set to take much of the strain following the ratings agency's decision.

Unlike the US, the UK does not have the same luxury of blaming the loss of its AAA badge on the dismal global economy.  In Britain the problems are also domestic, and this is painfully clear to investors.

Aberdeen Asset Management's Paul Griffiths, co-global head of fixed income, argued that over the longer term the UK's borrowing costs are likely to rise, but the most immediate impact of Moody's downgrade will be felt elsewhere.

He said: 'The more immediate concern is likely to be a further weakening of the pound, which has already had a move lower in the first few weeks of this year.

'This will be immediately beneficial for our exporters but the medium-term risk is that this sees inflation imported with the rising cost of good and services from abroad.'

Ultimately, such an effect would not be supportive for gilts, even if over the near-term they are protected because a significant proportion are bought by overseas investors with the choice of where to invest.  At the margin some of them might decide to trim their holdings following the downgrade.

Trevor Greetham, Fidelity's asset allocation director, went further than to say there would be little impact on the back of Moody's Friday night announcement, and said sometimes ratings agencies should simply be 'ignored'.

Even though the US was offered some shelter on the back of its downgrade because investors continued to view American paper as a safe haven, causing treasury yields and the dollar to rally, Greetham pointed out the cut in the US' credit status was a little ironic given policy makers had delayed spending cuts.

'It was a deferral of government cuts that lost America its AAA rating in August 2011, but the US strategy of putting off fiscal tightening until the economy was stronger looks to be paying off,' he pointed out.

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