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AAA loss: First reaction of financial markets due AAA loss: Pound falls as markets react to downgrade
(about 2 hours later)
The financial markets are set to deliver their first reaction to the loss of Britain's top AAA credit rating when they open in London later. Sterling fell during trading in Asia as financial markets reacted to the loss of Britain's top AAA credit rating.
Ratings agency Moody's cut the UK's top rating to Aa1 on Friday night. The pound fell to a 31-month low against the dollar and a 16-month low against the euro.
The government has played down the move but Labour described it as a "humiliation" for the coalition, and said ministers must change course. Further falls are expected when markets open in Europe amid concerns that the credit downgrade points to further problems for UK economic recovery.
There are fears that sterling will be hit hard in the wake of the downgrade - the first since the 1970s. Ratings agency Moody's made the downgrade on Friday evening, the first cut since the 1970s.
The value of sterling has been edging down for several weeks amid speculation that the AAA rating was under threat.
In trade in Asia on Monday, it fell to $1.5073, while against the euro it was 1.145 euros. A euro is now worth 87.3p.
The government has played down Moody's move, but Labour described it as a "humiliation" for the coalition, and said ministers must change course.
The pound fell late on Friday after the downgrade, with Moody's warning that growth would "remain sluggish" over the next few years.The pound fell late on Friday after the downgrade, with Moody's warning that growth would "remain sluggish" over the next few years.
It also said the government's debt reduction programme faced significant "challenges". Moody's also said the government's debt reduction programme faced significant "challenges".
Chancellor George Osborne said the decision was "a stark reminder of the debt problems facing our country" but it did not mean the government should change course.Chancellor George Osborne said the decision was "a stark reminder of the debt problems facing our country" but it did not mean the government should change course.
"What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it," he said."What is the message from the ratings agency? Britain's got a debt problem. I agree with that. I've been telling the country for years that we've got a debt problem, we've got to deal with it," he said.
"We've got to take tough measures to do that and I think people understand that.""We've got to take tough measures to do that and I think people understand that."
Howard Archer, chief UK and European economist at IHS Global, said the pound would be "particularly vulnerable" after the downgrade, but the markets had been increasingly pricing in the AAA rating loss for some time.Howard Archer, chief UK and European economist at IHS Global, said the pound would be "particularly vulnerable" after the downgrade, but the markets had been increasingly pricing in the AAA rating loss for some time.
But the Federation of European Employers warned Moody's decision could have a profound impact on the City of London as one of the world's top financial centres.But the Federation of European Employers warned Moody's decision could have a profound impact on the City of London as one of the world's top financial centres.
Secretary general Robin Charter said: "The downgrading of the UK's credit status is a blow for the UK as a leading financial centre and the UK balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of sterling and have a major impact on GDP."Secretary general Robin Charter said: "The downgrading of the UK's credit status is a blow for the UK as a leading financial centre and the UK balance of payments is so reliant on its financial services that even a small loss in trading income could affect the value of sterling and have a major impact on GDP."
'Difficult time''Difficult time'
Speaking on the BBC's Andrew Marr Show on Sunday, Business Secretary Vince Cable dismissed the downgrade as "largely symbolic".Speaking on the BBC's Andrew Marr Show on Sunday, Business Secretary Vince Cable dismissed the downgrade as "largely symbolic".
Mr Cable likened credit ratings agencies to "tipsters" and part of the "background noise we have to take into account", suggesting they had a "pretty bad record" on economic and corporate forecasting.Mr Cable likened credit ratings agencies to "tipsters" and part of the "background noise we have to take into account", suggesting they had a "pretty bad record" on economic and corporate forecasting.
He said the US and France had both survived similar cuts to their ratings in the past.He said the US and France had both survived similar cuts to their ratings in the past.
"In terms of the real economy, there is no reason why the downgrade should have any impact... these things do not necessarily affect the real economy but they do reflect the fact that we are going through a very difficult time," he said."In terms of the real economy, there is no reason why the downgrade should have any impact... these things do not necessarily affect the real economy but they do reflect the fact that we are going through a very difficult time," he said.
Shadow chancellor Ed Balls has described the downgrade as a "humiliating blow", and urged Mr Osborne to act fast to "kick-start our flat-lining economy".Shadow chancellor Ed Balls has described the downgrade as a "humiliating blow", and urged Mr Osborne to act fast to "kick-start our flat-lining economy".
But former Conservative chancellor Ken Clarke said the coalition should "stick to" its policy, adding: "I think the way in which we will recover confidence is making clear we're a strong firm government, that the strategy we're on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd."But former Conservative chancellor Ken Clarke said the coalition should "stick to" its policy, adding: "I think the way in which we will recover confidence is making clear we're a strong firm government, that the strategy we're on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd."
The UK is at risk of slipping back into recession for the third time since 2008.The UK is at risk of slipping back into recession for the third time since 2008.
The economy grew in the third quarter of last year, boosted by the impact of the Olympics, but shrunk again by 0.3% in the last three months of 2012 and would enter a triple dip recession if it contracted in the first quarter of 2013.The economy grew in the third quarter of last year, boosted by the impact of the Olympics, but shrunk again by 0.3% in the last three months of 2012 and would enter a triple dip recession if it contracted in the first quarter of 2013.
Germany and Canada are the only major economies to currently have a top AAA rating, as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.Germany and Canada are the only major economies to currently have a top AAA rating, as much of the world has been shaken by the financial crisis of 2008 and its subsequent debt crises.