UK AAA rating safe, says Moody’s

20 September 2010 0:00 am | Updated: 20 September 2010 10:46 am | By Lee Jones

The UK has the ability to maintain its AAA rating, according to Moody’s.

The ratings agency says that, despite a weak post-crisis balance sheet and challenging economic outlook, the UK will be able to maintain its ability to sell AAA rated sovereign debt.

Moody’s lead analyst for the UK Kenneth Orchard says: “The global financial crisis caused serious long-term damage to the British Government’s balance sheet. The country’s economic outlook is also more challenging because private sector deleveraging, the uncertain state of the financial sector and slower growth in the UK’s main trading partners are not conducive to allowing GDP growth to return to its pre-crisis trend rate.

“Nevertheless, Moody’s believes that the UK has the wherewithal and ability to meet these challenges whilst maintaining its AAA rating.”

Moody’s says it is the UK Government’s commitment to stabilise and reverse the deterioration of public finances that will keep the AAA rating stable. Moreover, it says the UK economy is sufficiently flexible and robust to grow moderately.

But the ratings agency warns that there are still scenarios that could dent the UK’s ability to hold top-rated debt - persistent private sector deleveraging and very weak growth in Europe as well as a reduced political commitment to fiscal consolidation could prevent a stabilisation in debt ratios could mean UK debt is downgraded.

Orchard says: “A sharp rise in bond yields, possibly associated with an inflation shock or deterioration in market confidence, could also cause a worsening in debt affordability. Alternatively, renewed problems in the banking sector could force a resumption of official support programmes and indirectly cause larger government budget deficits, thereby exerting negative pressure on the rating.”

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