After U.S. markets closed today, Moody’s Investors Service cut its ratings on U.K. domestic- and foreign-currency government bonds from ‘Aaa’ to ‘Aa1’. The ratings agency also lowered its rating on the country’s central bank, the Bank of England, from ‘Aaa’ to ‘Aa1’. Both ratings are accompanied by a stable outlook.
In issuing the downgrade Moody’s cited “sluggish growth” in the medium term which the agency expects to continue to the end of the decade, the challenges that this slow growth poses to the government’s “fiscal consolidation programme,” and the country’s “high and rising debt burden” which will give the government little room to maneuver until at least 2016.
Moody’s had threatened a similar action on U.S. debt if the government could not figure out a way to dodge the fiscal cliff. Standard & Poor’s and Egan Jones have both cut U.S. debt to below triple-A status.
Moody’s believes that the mounting debt levels in a low-growth environment have impaired the sovereign’s ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody’s has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.
The Moody’s press release is available here.