Articles - UK put on alert amid further European sovereign downgrades


– The downgrades are likely to have a marginal negative impact, even though most of the changes in Moody’s ratings and outlooks were expected.

– In our view, the change in outlook from Moody’s for the UK should be taken as a warning. An slippage in the UK government’s fiscal programme must be made up for with additional fiscal tightening.

– The UK government is being warned that it must do more to boost growth through structural reforms.

 Azad Zangana, European Economist at Schroders comments:

 “Credit rating agency Moody’s took action on Monday night to downgrade its rating of the credit worthiness of six eurozone sovereigns. This included single notch downgrades in Italy and Portugal, while Spain was downgraded by two notches.
 
 “In addition, Moody’s downgraded the outlook on the ratings of France, Austria and the UK from stable to negative, warning that there is a 30% probability that these three sovereigns could lose their respective Aaa ratings in the next 18 months. Note that the sovereigns that were downgraded also have a negative outlook with respect to their individual ratings.
 
 “The downgrades are likely to have a marginal negative impact, even though most of the changes in Moody’s ratings and outlooks were expected and follow the similar moves from rival credit rating agency Standard & Poor’s (S&P) on 13 January.
 
 “Moody’s points to uncertainty over the prospects for the euro area’s institutional reform of its fiscal and economic framework and, in particular, the resources that will be made available to deal with the crisis. Many will remember that European leaders decided not to increase the actual amount of money in the European Financial Stability Facility (EFSF) back in October, but instead opted to try to leverage up the funds that had remained. Since then, the plan has fallen flat as outsiders like China have declined to pay into the fund, while the scheme that was designed to insure against losses was deemed unattractive.
 
 “In addition to the institutional shortcomings, Moody’s cites the weak macroeconomic prospects, which puts the austerity measures of these sovereigns at risk. This will be highlighted on Wednesday this week when we expect to see GDP data showing many eurozone economies, including the big four of Germany, France, Italy and Spain, contracting at end of last year. With regards to the UK, there is no doubt that the announcement from Moody’s will ignite fierce political debate across the political spectrum. The opposition has been arguing that the government should cut spending more slowly, and possibly even reverse some of the tax hikes (such as VAT) in order to stimulate growth. Even Liberal Democrats within the coalition government have been pushing for earlier implementation of planned increases in National Insurance thresholds, which would amount to tax relief.
 
 “While Moody’s primarily warns of a lack of growth in the medium term for the UK and proximity to the eurozone debt crisis being the key factors behind its change in the outlook, it also warns that one of the factors that would lead to an actual downgrade would be a ‘reduced political commitment to fiscal consolidation, including discretionary fiscal loosening or a failure to respond to a deteriorating fiscal outlook’.
 
 “In our view, the change in outlook from Moody’s for the UK should be taken as a warning that any slippage in the government’s fiscal programme must be made up for with additional fiscal tightening. At the same time, the government is being warned that it must do more to boost growth through structural reforms.”
  

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