The UK’s cherished AAA credit rating could be put under threat by the eurozone debt crisis, Moody’s warned as it confirmed Britain’s gold standard borrowing status.
The influential credit ratings agency said the UK faced “formidable and rising challenges”, adding it was only “somewhat cushioned” from the crisis. Moody’s recently put the credit ratings of all countries in the single currency under review, but warned no EU country was immune to the effects of the crisis.
“The outlook on the rating 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,” Moody’s said.
Another bank bailout or a weakening in the economic outlook could derail the UK’s efforts to retain its credit rating, while Moody’s added the government must stay on track with its fiscal consolidation to hold on to its AAA status. The eurozone crisis, the weakening economy and increasing government debt mean the UK has “a reduced ability to absorb further macroeconomic or fiscal shocks without rating implications”, it said.
The Treasury welcomed the news that the UK has retained its top level credit rating. The UK’s borrowing costs would be driven up and the government’s deficit reduction plan would be thrown into doubt if it received a downgrade from Moody’s, Fitch or Standard & Poor’s.
A spokesman for the Treasury said: “The government’s deficit reduction plan has helped restore confidence in the UK economy and keep interest rates low.
“However, as Moody’s report points out, the UK is not immune to the problems facing our trading partners in the euro area. The crisis is having a chilling effect across Europe and it is important that the euro area continues to take decisive action to fix their problems.”
Moody’s described the UK as having “one of the most competitive of the large advanced economies in the world, and a track record of reversing increases in debt over many decades”.
The UK’s fiscal institutions have been strengthened by the Office for Budget Responsibility, the independent financial watchdog set up by the coalition government, the credit ratings agency added.
The FTSE 100 was unaffected by the warning of a potential downgrade in future, beginning the morning’s trading with slight gains.