UK, France, Austria warned of AAA ratings threat
by Daniel Mason
The United Kingdom, France and Austria have had their AAA credit ratings placed on negative outlook by Moody's because of weak growth and the impact of the ongoing eurozone crisis. It means each country has a one-in-three chance of losing its top notch status in the next 18 months. The rating agency also cut the credit standing of six euro area countries including Spain, Italy, Portugal, Slovakia, Slovenia and Malta.
In a statement published last night, Moody's said its decision reflected "Europe's increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness". It also noted "uncertainty" over the level of resources made available to deal with the debt crisis, and warned that market confidence was "likely to remain fragile" amid a "high potential for further shocks to funding conditions for stressed sovereigns and banks".
Spain was downgraded to A3 from A1, Italy and Malta to A3 from A2, Portugal to Ba3 from Ba2, and Slovakia and Slovenia to A2 from A1. All were assigned a negative outlook on the new ratings. Meanwhile, Spanish banks were hit by downgrades from rival rating agencies Standard & Poor's and Fitch.
While putting the UK, Austria and France on negative outlook, Moody's reaffirmed the AAA ratings of Germany, the Netherlands, Finland, Denmark, Sweden and Luxembourg, saying they were "appropriately positioned". It also confirmed the top rating of the European Financial Stability Facility because no AAA rated contributors to the eurozone's temporary bail-out fund were downgraded. But the worsened outlook for the UK sovereign was accompanied by an identical move on the debt rating of the Bank of England.
Moody's sweeping ratings action followed a similar move by S&P in January, when it downgraded a series of eurozone countries including AAA rated France and Austria. However, Moody's differed from S&P by targeting the UK, indicating concerns about contagion spreading beyond the borders of eurozone.
Explaining its decision, Moody's said there was "increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years, with risks skewed to the downside". It added that the country's trade and financial links with the eurozone meant the crisis was exerting "negative pressure" on the AAA rating. Moody's predicted that the UK's debt would peak later and higher than in other top-rated countries, but praised the government' "willingness and ability" to implement fiscal consolidation.
Nevertheless it warned that a rating downgrade could follow in the event of "significantly slower economic growth over a multi-year time horizon", a rise in debt refinancing or renewed problems in the banking sector. In response, finance minister George Osborne said Moody's decision was proof that the government had to remain committed to austerity measures and it was "a reality check for anyone who thinks Britain can duck confronting its debts".
In the last quarter of 2011 the British economy contracted 0.2 per cent and Ed Balls, Labour's shadow finance minister, said the move showed that Osborne's policy was not working. "Even the rating agencies now recognise that austerity alone is self-defeating. The world is making 1930s mistakes – and rating agencies are partly responsible. This is the first evidence that even the rating agencies are waking up to this," he told the BBC.
Vicky Redwood, chief UK economist at Capital Economics, described it as a "slight blow" for Osborne. But she added: "The decision is likely to reinforce the government's commitment to its deficit-cutting measures and perhaps make a loosening in next month's budget even less likely than it already was." She said it was "quite possible" the UK would lose its AAA rating but even then it would "look the best of a bad bunch" – meaning the country's status as a safe haven should not be significantly damaged.
But Philip Booth, editorial director at the Institute for Economic Affairs, said many of the UK's problems were home grown. "The Office for Budget Responsibility has shown that there are huge pressures forthcoming from the effects of ageing populations due to increased health, long-term care and pensions costs. Furthermore, the pressures on business coming in the form of increased regulation – including in the vital banking sector – are supressing growth. All these things mean that the UK's top-notch credit rating is deservedly on a knife-edge."
The economic woes of the eurozone were emphasised again today, with the news that industrial production in the single currency bloc fell by 1.1 per cent in December last year, compared with the previous month. Notably, the second biggest drop in the European Union after Malta was in Germany, which saw production slide by 2.7 per cent. According to Eurostat, the EU's best performer was non-euro member Denmark, which managed growth of 3.3 per cent. Separately, new figures from Greece showed that its crisis-hit economy shrank 7 per cent on an annual basis in the last three months of 2011, while the Portuguese economy contracted 1.5 per cent last year.
Today, the European Commission revealed that 12 countries would be assessed in depth under its new pre-emptive alert mechanism report. The analysis is designed to act as a warning of macroeconomic imbalances. Commission vice-president Olli Rehn said Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, Hungary, Slovenia, Finland, Sweden and the UK would be put under the microscope. Greece, Ireland, Portugal and Romania were not included in the report because they are already subject to extra economic surveillance.