Moody's Downgrades U.K. Debt

On Friday, rating agency Moody's (NYSE: MCO  ) announced that it has downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch, to "Aa1" from "Aaa." In so doing, Moody's became the first of the big three debt rating agencies to strip the U.K. of its coveted top rating -- but it may not be the last.

According to a press release announcing the downgrade, Moody's now rates the "outlook" for U.K. debt at "stable," suggesting it has no plans to downgrade the nation's debt any further, anytime soon. The same cannot be said for fellow raters Fitch and Standard & Poor's, however. Both agencies currently have negative outlooks on U.K. debt, suggesting they could follow in Moody's footsteps at any moment.

Justification for such follow-on downgrades, if they happen, might follow the lines laid out in Moody's own Friday downgrade:

1. The continuing weakness in the U.K.'s medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second half of the decade.

2. The challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament.

3. And, as a consequence of the U.K.'s high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.

Fitch and S&P could decide to hold back, however, and for the same reasons Moody's sees no reason to downgrade further. Namely: "[T]he U.K.'s creditworthiness remains extremely high ... because of ... (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure."


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