Articles - Comments on the UK downgrade from AAA

 Ian Winship, Head of Sterling Bonds, BlackRock comments:

 "The timing of this decision is surprising for several reasons. In terms of the Economic story we would seem to be past the worst and believe it very unlikely that a factor such as the collapse in construction activity that weighed on GDP in 2012 will reoccur. Risk sentiment is currently strong, risk-free rates remain low, bank funding costs have fallen and are backstopped by the FLS. As a result, credit availability is improving and the price of that credit (mortgage rates) is falling.

 "The referenced medium-term growth outlook, which was downgraded by the market last year and by the OBR in December's Autumn Statement, has if anything improved since then. In fact, the current set of financial conditions in the UK - yields below 50bps out to mid 2016, bank funding costs sharply down, currency weakening - put the economy in the best situation for a recovery that we have seen since the crisis.

 "The deficit has also benefitted from several one-off factors over the last 12 months (Royal Mail pension assets, Bank of England QE coupons and profits from its SLS scheme, the 4G spectrum auction) which have significantly reduced the near-term need to raise money in the gilt market.

 "However, we agree that the "the shock-absorption capacity of the government's balance sheet" has deteriorated. This has been clear since the Eurozone crisis in 2011 shifted the fiscal consolidation off-track but this is not "new" news. The government has no way of offsetting an exogenous shock it's consolidation plan is fully conditional on a slow path to recovery.

 "The likely impact of the downgrade will be political, with implications for the shape of the Chancellor's March budget and the outlook for the deficit, and in the longer term the extent to which the Moody's action may influence thinking on matters as diverse as the General Election itself in 2015 and the EU referendum. The currency may continue to bear the brunt of political uncertainties and this at some point will have more of a real economic impact." 

 Andrew Sutherland, Head of Credit, Standard Life Investments:

 "It is important to put the announcement from Moodys in perspective. The rating move was just one notch and the outlook remains stable. France (Aa1 Moodys AA+ S&P) and the US (AA+ S&P) remain on negative outlook. So stable is good!

 "What are the potential impacts? The UK Budget may be more spending-friendly than expected, for example infrastructure spending. Indeed, the prospect of this announcement may have been behind the Bank of England considering further QE, ie supporting higher gilt issuance.

 "Other credit ratings for the UK are largely unaffected. Bonds guaranteed directly by HM Government eg UK Rail, (who issued £420m 2027 index linked debt at gilts + 35bps last week) or LCR Finance (Chunnel link) should be downgraded. There will probably not be a big impact on their spreads.

 "Elsewhere bank covered bonds eg the AAA rated issued by RBS, Lloyds & Nationwide, etc will not be affected, as they do not have a government guarantee component. However, local authority debt which is A/AA rated could be downgraded as the agencies use a notching process relative to the underlying sovereign.

 "Supranational debt where the UK is involved eg EIB or World Bank could see pressure on AAA ratings, but the UK’s stable outlook might be sufficient to hold it. All the agencies are AAA negative at the moment."

 Philip Laing, Head of Rates, Standard Life Investments:

 "The loss of the UK's AAA rating from one of the main credit assessment agencies really comes as no surprise, although perhaps its timing does ahead of the UK Budget on 20 March.

 "The writing had been on the wall since the Autumn Statement where the lack of progress on deficit reduction was starkly highlighted. There have been question marks over the Chancellor's austerity plans ever since.

 "With the slippage of sterling and the credit rating casting an uncomfortable light upon the UK economy's deficit/growth mix our funds prefer other markets such as Australia, Canada and Germany."

 Schroders European Economist, Azad Zangana, comments on the recent downgrade:

 "The downgrade therefore comes as no surprise, with the economy double-dipping in 2012, and is currently on the verge of a triple-dip recession. Indeed, both gilts and sterling have been under pressure since the end of 2012, as speculation of a downgrade had been building.

 "Moody's cited three key factors behind its downgrade:

 1. The continued weakness in the UK's medium-term growth outlook;

 2. The implications of weak medium-term growth for the UK's public finances, leading to higher debt;

 3. And, as a consequence, the deterioration in the UK's ability to absorb future shocks using the government's balance sheet.

  "Moody's did however revise up its rating outlook back to stable, indicating that the UK would not be downgraded further.

 "Overall, this downgrade had been on the cards for some time, and the market reaction this morning suggests there are bigger concerns out there for investors, such as the elections in Italy for example. Both Standard and Poor's and Fitch also have the UK's outlook on negative watch, and so we expect the others to follow suit. This could push some investors that are forced to hold ‘AAA' rated assets to sell out of gilts, however, in a world where the pool of ‘AAA' rated assets is shrinking, we do not expect to see much of an impact.

 "The fallout of the downgrade is more likely to be felt in Westminster rather than the City, where Chancellor George Osborne has used the ‘AAA' rating as a benchmark for economic competence. With less than a month to go before the 2013 Budget, the ‘strategic leaks' of policy measures have been strangely absent from the news. Osborne's own party are calling for deeper cuts in spending, with the savings used to cut taxes, while the opposition are calling for more public spending. The ideological debate on the size of government does not help the present situation. The Chancellor should take advantage of near record low borrowing costs to fund long-term infrastructure projects, but at the same time, should focus on structural reforms to boost productivity, which has plummeted in recent years."

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