Moody's downgrades six eurozone countries
RATINGS agency Moody’s has downgraded the credit rating of six eurozone countries and threatened Britain with the loss of its AAA credit rating in the most serious challenge yet to the UK economy.
The outlook for the creditworthiness of Britain, France and Austria is now negative while Italy, Portugal, Slovakia, Slovenia and Malta have been downgraded by one notch and Spain by two notches.
The “high risk of further shocks” within the eurozone that would hit the UK could also cost Britain its AAA status, the agency said.
Moody's said the changes reflected Europe's economic prospects and the uncertainty over the resources that will be made available to tackle the eurozone debt crisis.
The US rating agency said Germany's top-tier rating "appropriate" and it affirmed the triple-A rating on the eurozone's bailout fund, the European Financial Stability Fund.
The agency’s analysis of the British economy will electrify the political debate about the coalition government’s policy with Labour likely to argue that the austerity policies are strangling economic growth.
Earlier, ratings agencies Fitch and Standard & Poor's lowered their credit rating of Spanish banks, including the country's four largest lenders, following their downgrade of Spain last month.
Moody’s said its “central expectation” is still that Britain will hit its targets of clearing the bulk of the deficit by 2015/16, and starting to reduce the stock of Government debt.
But weak economic growth raises significant doubt about that, the agency said, noting that the British Government has “reduced capacity” to absorb any new economic shocks without “slippage” on its timetable.
Britain is currently paying record-low interest rates on its bonds, partly because investors see the UK as a “safe haven,” the agency said.
However, there is “also a growing risk that the weaker macroeconomic outlook could damage market confidence in the government's fiscal consolidation programme and cause funding costs to rise.”
Moody’s set out three scenarios that could see UK follow economies like France and the US in the loss of AAA status.
The first is a combination of slow growth and a “reduced political commitment to fiscal consolidation”, most likely a Government decision to slow its cuts.
The second is a sharp rise in the rate paid on Government bonds, possibly because of a sudden rise inflation or a loss of market confidence. The third is a new banking crisis, triggering fresh Government bailouts for the financial sector.
George Osborne, the Chancellor, last night insisted that the Moody’s warning was proof that the Coalition must stick to its plans on the deficit.
He said: “This is proof that, in the current global situation, Britain cannot waver from dealing with its debts.”