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George Osborne under pressure as Britain loses AAA rating for first time George Osborne under pressure as Britain loses AAA rating for first time
(35 minutes later)
Britain was stripped of its AAA rated debt status for the first time ever on Friday night in a move that puts pressure on George Osborne, who had pledged to use his austerity measures to protect the rating. Britain was stripped of its AAA-rated debt status for the first time ever on Friday night in a move that puts pressure on George Osborne, who had pledged to use his austerity measures to protect the rating.
The chancellor, who had 12 hours' notice of the decision by Moody's ratings agency, insisted he would stick to his course and had "redoubled" his resolve to tackle Britain's financial problems. However the downgrading will have major political implications for the coalition. The chancellor, who had 12 hours' notice of the decision by Moody's ratings agency, insisted he would stick to his course and had "redoubled" his resolve to tackle Britain's financial problems. However, the downgrading will have major political implications for the coalition.
Labour and the Tories have acknowledged that the next election will probably be decided by who wins the debate over the best way of improving the economy. Unfortunately for Osborne, he will be forced to listen to a series of opposing politicians reminding him of his previous promises that he will maintain Britain's top rating. Labour and the Tories have acknowledged that the next election will probably be decided on the debate over the best way of improving the economy. Unfortunately for Osborne, he will be forced to listen to a series of opposing politicians reminding him of his previous promises that he would maintain Britain's top rating.
Shadow chancellor Ed Balls said on Friday: "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."
Moody's, the first of the major agencies to remove the UK from the elite club of AAA countries, blamed "subdued growth" and a "high and rising debt burden" for the decision to cut the rating by one notch.Moody's, the first of the major agencies to remove the UK from the elite club of AAA countries, blamed "subdued growth" and a "high and rising debt burden" for the decision to cut the rating by one notch.
The rating is significant because it can affect a country's cost of borrowing and is also symbolic to governments determined to prove their economic credentials. Sterling may now be expected to come under pressure on foreign exchange markets.The rating is significant because it can affect a country's cost of borrowing and is also symbolic to governments determined to prove their economic credentials. Sterling may now be expected to come under pressure on foreign exchange markets.
Osborne, who has cited the importance of the triple A status many times, as far back as 2010, said: "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. 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." Osborne, who has cited the importance of the triple-A status many times, as far back as 2010, said: "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. 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."
Only 24 hours before, Osborne had been forced to admit ahead of next month's budget that borrowing will rise this year, not fall as he pledged in his autumn statement. His own independent tax and spending watchdog, the Office for Budget Responsibility (OBR) said lower tax receipts and higher spending meant it was unlikely the borrowing forecasts would be met. Only 24 hours before, Osborne had been forced to admit ahead of next month's budget that borrowing would rise this year, not fall, as he pledged in his autumn statement. His own independent tax and spending watchdog, the Office for Budget Responsibility (OBR) said lower tax receipts and higher spending meant it was unlikely the borrowing forecasts would be met.
Moody's decision to cut the rating without awaiting the detail of Osborne's 20 March budget may surprise some economists, but it decided to move now because of the evidence of a "high and rising debt burden".Moody's decision to cut the rating without awaiting the detail of Osborne's 20 March budget may surprise some economists, but it decided to move now because of the evidence of a "high and rising debt burden".
With the UK one quarter away from a triple-dip recession, Moody's blamed "continuing weakness in the UK's medium-term outlook with a period of sluggish growth which Moody's now expects will extend into the second half of the decade".With the UK one quarter away from a triple-dip recession, Moody's blamed "continuing weakness in the UK's medium-term outlook with a period of sluggish growth which Moody's now expects will extend into the second half of the decade".
But, it added that a "combination of political will and medium-term fundamental underlying economic strength will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK's debt trajectory". But it added that a "combination of political will and medium-term fundamental underlying economic strength will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK's debt trajectory".
Moody's has now placed the UK rating on a "stable footing" but its rivals Standard & Poor's and Fitch have the country under review for a potential downgrade.Moody's has now placed the UK rating on a "stable footing" but its rivals Standard & Poor's and Fitch have the country under review for a potential downgrade.
"It would be a big mistake to get carried away with what Moody's or any other credit rating agency says," said Balls. "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."
This quarter is regarded as crucial for the chancellor if the country is to avoid a triple dip recession following the 2008 banking crisis which led to sharp reductions in growth in early 2009.This quarter is regarded as crucial for the chancellor if the country is to avoid a triple dip recession following the 2008 banking crisis which led to sharp reductions in growth in early 2009.
The economy contracted by a surprise 0.3% in the last three months of 2012 and if it shrinks again in the subsequent three months it would be regarded as once again in recession. Employment, though, ended 2012 at 29.7m – the highest number of people in work since records began in 1971.Sterling had been jolted earlier in the week when it emerged that Bank of England governor Sir Mervyn King had wanted to print more electronic money - quantitative easing - in an effort to bolster growth. Last night in the last minutes of trading in New York, sterling was knocked to $1.5160 but is expected to come under pressure when Asian markets open for trading on Monday. Moody's also cut the central bank's rating last night. The economy contracted by a surprise 0.3% in the last three months of 2012 and if it shrinks again in the subsequent three months it would be regarded as once again in recession. Employment, though, ended 2012 at 29.7m – the highest number of people in work since records began in 1971.
Sterling had been jolted earlier in the week when it emerged that Bank of England governor Sir Mervyn King had wanted to print more electronic money – quantitative easing – in an effort to bolster growth. In the last minutes of trading in New York on Friday, sterling was knocked down to $1.516, but is expected to come under pressure when Asian markets open for trading on Monday. Moody's also cut the central bank's rating last night.
"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 market opens (in Asia) on Sunday," Kathy Lien, managing director of BK Asset Management in New York told Reuters."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 market opens (in Asia) on Sunday," Kathy Lien, managing director of BK Asset Management in New York told Reuters.