Calls for Osborne to quit as Britain loses cherished AAA credit rating and is downgraded for the first time in 35 years to same level as France over fears of triple-dip recession
- It is the first time since 1978 that the Britain has seen its rating dropped from AAA
- Britain had been placed on ‘negative watch’ by all three of the big rating agencies
- But Chancellor Osborne remains bullish and says it only reinforces Britain’s need to improve
- The UK is now at the same rating level as France
- Shadow Chancellor Ed Balls describes the move as a ‘humiliating blow’ to Osborne
PUBLISHED: 16:51 EST, 22 February 2013 | UPDATED: 20:41 EST, 22 February 2013
There are growing calls for Chancellor George Osborne to quit after the UK lost its cherished AAA credit rating despite the Coalition’s efforts to cut the deficit.
Moody’s, one of the three main credit ratings agencies, announced that it was cutting Britain’s rating to Aa1, one notch below the top grade, dealing the government a massive economic blow.
It is the first time since 1978 that the UK has seen it’s rating dropped from the AAA level.
The UK has long trumpeted its AAA rating as evidence that the country is economically stronger than the beleaguered eurozone.
The Government’s austerity program has long been intended to avoid the country avoiding the pariah status of European states like Greece, and George Osborne has previously trumpeted the UK’s AAA rating as evidence the policy was working.
This is the first time since the start of the financial crisis that one of the major agencies has downgraded Britain.
When an agency stripped the U.S. of its AAA rating in 2011, it set off a political storm which led to calls for an austerity drive.
For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies – Moody’s, Standard & Poor’s and Fitch – had placed Britain’s rating on negative watch, as the economy continues to struggle.
The British government is in the midst of a program of spending cuts designed to reduce the nation’s hefty deficit, but the austerity program has failed to stimulate economic growth.
Moody’s said in a statement that although the country has structural strengths, the weak global economy will continue to drag down UK growth for the foreseeable future.
It also blamed ‘the ongoing domestic public- and private-sector deleveraging process’ for suppressing growth.
Some Tory MPs are already privately urging Mr Cameron to move the Chancellor in the next Cabinet reshuffle.
Lib Dem ministers are pressing the Chancellor to do more to stimulate growth, particularly through spending on housing and infrastructure. The Prime Minister has indicated he intends to stick with Mr Osborne until the election.
The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 per cent. But the economy contracted by a worse-than-expected 0.3 per cent in the last three months of 2012.
In February 2010, just months before taking control of the Treasury, Mr Osborne declared: ‘Our first benchmark is to cut the deficit more quickly to safeguard Britain’s credit rating. I know that we are taking a political gamble to set this up as a measure of success.’
Eight months later David Cameron boasted that the Coalition had dragged the economy ‘out of the danger zone’.
The downgrade will place huge pressure on George Osborne to bring forward dramatic new measures to boost growth in next month’s Budget.
Mr Osborne gave a bullish response to the news, claiming the blow has only increased the Government’s resolve to tackle Britain’s debt crisis.
‘Tonight we have a stark reminder of the debt problems facing our country – and the clearest possible warning to anyone who thinks we can run away from dealing with those problems,’ he said in a statement.
‘Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.
‘We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs.’
He also warned that if the Government eased up on its austerity plans, it could lead to a further downgrade.
Mr Osborne went on: ‘As the rating agency says, Britain faces huge challenges at home from the debts built up over many, many years, and it is made no easier by the very weak economic situation in Europe.
‘Crucially for families and businesses, they say that ‘the UK’s creditworthiness remains extremely high’ thanks in part to a ‘strong track record of fiscal consolidation’ and our ‘political will’.
‘They also make it absolutely clear that they could downgrade the UK’s credit rating further in the event of ‘reduced political commitment to fiscal consolidation’.
‘We are not going to run away from our problems, we are going to overcome them.’
The downgrade is a major blow for Mr Osborne, who has been coming under increasing pressure to take action to stimulate the economy.
The Chancellor has used maintaining the top credit rating for Government bonds as one of the key arguments for the Government’s austerity programme.
However, Labour has insisted that withdrawing demand from the economy has put it more at risk by stunting growth.
The UK retains its AAA credit rating with Fitch and Standard & Poor’s, the two other main agencies.
The fear is that a downgrade of credit rating can lead to an increase in borrowing, however the British government will be keen to point out that when the U.S. saw it’s credit rating downgraded to AAA, its borrowing levels remained at a record low.
Germany and Canada remain the only major economies to have a top AAA rating.
The news has been met with dismay by many senior economical experts.
Writing on Twitter, ex-Bank of England Policy member David Blanchflower, a keen opponent of Osborne, has labelled the Chancellor as a ‘failure’ over Britain’s downgrade and has called for the him to resign.
- France – Was stripped of its AAA rating in November 2012, despite President Hollande’s pledge of reforms. Moved to the Aa1 rating, Moody’s highlighted the ‘structural challenges’ as the main reason for the downgrade, such as high unemployment and lack of competitiveness.
- Spain – Standard & Poor cut Spain’s credit rating by two notches to BBB- in February 2012 after citing the economic conditions severely limited the government’s options.
- Italy – Moody’s downgraded Italy’s rating from A3 to Baa2 on concern that deteriorating financial conditions in Europe will lead to a sharp rise in borrowing costs.
- Portugal – Their credit rating was downgraded to the same level as Spain in 2012, BBB-, which is below the investment level, one level above junk status. This was absed on concern that deteriorating financial conditions in Europe will lead to a sharp rise in deepening political, financial, and monetary problems within the euro zone, with which Portugal is closely integrated.
- USA – Their rating was downgraded to AA+ from AAA for the first time, which was seen as a symbolic blow to one of the great powers. Fears over how the national debt could be lowered was seen as a key factor.
- Greece – The struggling country has actually seen its status raised – however it was rock bottom at ‘selective default’ and is now at B- in light of its determination to cut spending, as wel as the willingness of other eurozone countries to help out.
- Slovakia, Slovenia and Malta have also seen their ratings downgraded in the last two years.
Labour MP and Treasury Select Committe John Mann has described Osborne as being ‘fatally wounded’ and that it is ‘time to go’.
The news is likely to intensify criticism from the Labour Party opposition of Osborne’s austerity program, which is two years off track from its original goal of largely eliminating Britain’s budget deficit by 2015.
Moody’s said that despite considerable structural economic strengths, growth is expected to be sluggish due to a combination of weaker global economic activity and the drag on the UK economy ‘from the ongoing domestic public- and private-sector deleveraging process.’
Trend growth for the UK economy is between 2 and 2.5 percent, Moody’s sovereign credit analyst Sarah Carlson said in a telephone interview with Reuters.
‘We see growth slowly building back up to that trend … but if you take a combination of the growth and fiscal dynamics, the result is that the debt burden of gross general debt to GDP peaks in 2016, which is substantially later than was expected a few years ago,’ she said.
Moody’s estimates debt-to-GDP for the UK peaking in 2016 at 96 percent, up from just below 90 percent now.
Sterling fell to around $1.5160 after the downgrade from about $1.5240, just off Thursday’s fresh 2-1/2-year low.
‘It’s a pretty big deal. We didn’t see a huge reaction in the pound because it’s late in the New York session.
‘But you’ll see some more aggressive selling when the markets open (in Asia) on Sunday,’ said Kathy Lien, managing director at BK Asset Management in New York.
Moody’s says that the country’s current economic recovery has already proven to be significantly slower – and believes that it will likely remain so – compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s.
Shadow chancellor Ed Balls said: ‘This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility.
‘It would be a big mistake to get carried away with what Moody’s or any other credit rating agency says.
‘Tonight’s verdict does not change the fact that the credit rating agencies have made major misjudgments over recent years, not least in giving top ratings to US sub-prime mortgages before the global financial crash.
‘But what matters is the economic reality that the credit rating agencies are responding to. Moody’s themselves say the main driver of their decision is the weak growth in Britain’s economy.
‘Their judgment is in response to nearly three years of stagnation, a double-dip recession, billions more borrowing as confirmed this week and broken fiscal rules. This is why the Chancellor is fast running out of credibility.’
Mr Balls went on: ‘The issue is no longer whether this Chancellor can admit his mistakes but whether the Prime Minister can now see that, with UK economic policy so badly downgraded in every sense, things have got to change.
‘In the Budget the Government must urgently take action to kick-start our flatlining economy and realise that we need growth to get the deficit down.
‘If David Cameron and George Osborne fail to do so and put political pride above the national economic interest we face more long-term damage and pain for businesses and families.’