Moody Blues

The Story……
The UK has lost its AAA credit rating for the first time since the 1970’s with Moody's downgrading its assessment of the outlook for the UK economy.

The Background……

There are three significant credit rating agencies in the world, with Moody’s being considered the biggest and most important. These agencies grade various countries / investment funds to provide investors with an independent opinion using various criteria. In the case of countries, the agencies are assessing their creditworthiness and their ability to pay back money lent to them. The more likely a country is to be able to pay back its debts, the higher the rating. The AAA rating is the highest honour, which countries strive to achieve / maintain as it allows them to borrow as cheaply as possible.

Current Problem……

On Friday, Moody’s downgraded the UK’s rating from AAA to AA1 due to its more negative view of how long it will take the UK to recover from the downturn. This is pretty consistent with my blog of ‘5 Becomes 10’ (http://stevesmithlive.blogspot.co.uk/2013/01/5-becomes-10.html).

The Consequences……

Losing our AAA rating is a major issue and is likely to have the following negative impact:

1.     The borrowing required by the Government (to bridge the gap between insufficient income and too much expenditure) will now cost us more as the interest rate the Government borrows at will be higher to reflect the UK being a greater risk now. This increases our expenditure at a time when we are trying to reduce it……and remember ‘we’ need to borrow £100 billion a year!

2.     The value of Sterling will fall. UK companies will suffer from greater importing costs or having lower profit margins on exporting goods / services. This will lead to lower company profits and lower tax revenues for the Government (compounding the income / expenditure gap).

3.     As a consequence of (1) and (2), it will take longer for the government to reduce the budget deficit (the whole point of the austerity measures in the first place).

Clearly some big issues……perhaps the biggest is whether George Osborne continues as Chancellor as the grand master economic plan for the UK just isn’t working……the Moody’s downgrade confirms that to all. Interesting times ahead of the budget on 20 March 2013.

Never dull is it!