Moody’s warns of “formidable” challenges to UK’s Aaa rating

Moody’s Investors Service has warned that the UK’s Aaa credit rating faces “formidable and rising challenges” in its annual report on the country.

According to the update, the UK still enjoys “significant structural strengths” and scores highly in the four factors underlying Moody’s sovereign rating methodology – long-term economic fundamentals, institutional strength, government financial strength and susceptibility to event risk.

But the ratings agency adds that, while these strengths are expected to endure, a number of issues could cause the UK government’s Aaa status to be reviewed.

“[The UK’s] near-term macroeconomic outlook has weakened and this will likely slow the pace of its fiscal consolidation,” Moody’s says.

“More generally, the significant increase in the government’s deficit and debt stock since 2008 has eroded its ability to absorb further macroeconomic or fiscal shocks without rating implications.”

In addition, the agency says that the Aaa rating depends on the government’s ability to stick with its fiscal consolidation plan.

However, as this programme could be set back by further macroeconomic weakening or crisis in the banking sector, the UK rating is likely to be “sensitive” to developments in the eurozone, even though the UK is not a member of the bloc.

Moody’s also reiterates that the UK is included in its forthcoming ratings review of European Union (EU) members and may face a downgrade as a result.

“Although non-euro area sovereigns within the EU – like the UK – can be expected to be somewhat cushioned from both the euro area sovereign debt crisis and its rating consequences, Moody’s says that no EU sovereign rating can be considered immune to this crisis,” the group concludes.

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