'Formidable challenges' threaten Britain's AAA rating: Moody's

21st December 2011, Comments 0 comments

Moody's on Tuesday warned Britain that its AAA credit rating may not survive future economic shocks, but the country's structural strengths means its gold-standard rating ias safe for now.

In its annual update to the markets on Britain's credit outlook, the US ratings agency highlighted the ongoing euro crisis and rising public debt as potential triggers for a downgrade.

The current rating is "predicated on the country's significant structural strengths" but is threatened by the "formidable and rising challenges" facing its economy, said the report published on Moody's website.

"The significant increase in the UK government's deficit and debt metrics since 2008, the weaker macroeconomic prospects and the risks emanating from the euro area crisis mean that the UK's stable AAA rating has a reduced ability to absorb further macroeconomic or fiscal shocks without rating implications," it cautioned.

British public sector net borrowing is forecast to hit £127 billion ($198 billion, 149 billion euros), or 8.4 percent of gross domestic product (GDP), in the financial year ending in April, the Office for Budget Responsibility forecast last month.

That is higher than the OBR's estimate of £122 billion published in March.

A Treasury spokesman said the report, which did not constitute a rating action, vindicated the government's deficit reduction plan.

"However, as Moody's report points out, the UK is not immune to the problems facing our trading partners in the euro area," added the spokesman.

"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".

An economic row erupted last week when the French central bank governor and senior ministers lined up to attack the British economy, suggesting rating agencies should be mulling a debt downgrade of Britain rather than France.

Moody's on Tuesday said Britain's national currency and central bank, which is able to act as a lender of last resort, provided the UK with "substantial flexibility in developing responses to economic and financial shocks".

The agency gave Britain strong scores on long-term economic fundamentals, institutional strength, government financial strength and susceptibility to event risk, and praised the country's new Office for Budget Responsibility for bolstering fiscal institutions.

However, it stressed that the British government needed to "stay on track" with its deep public spending cuts or risk a downgrade.

Any weakening in the macroeconomic outlook or need to support the country's banking system, which is heavily exposed to European debt, could derail the austerity drive, warned the report.

© 2011 AFP

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