LONDON -- Britain on Friday lost its top credit rating by Moody's Investors Service, which cited weakness in the nation's growth outlook and challenges to the government's fiscal consolidation program.
The United Kingdom's rating was lowered one level, to Aa1 from Aaa, and the outlook on the nation's debt changed to stable from negative, Moody's said in a statement. With the U.K.'s high and rising debt burden, deterioration in the government's balance sheet is unlikely to be reversed before 2016, Moody's said in the statement.
"This has been speculated as inevitable and is most likely largely in the market," said Charles Diebel, head of market strategy at Lloyds Banking Group Plc in London. "Historically, losing your AAA is actually a bond bullish event."
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg, published in December. Investors ignored 56 percent of Moody's rating and outlook changes and 50 percent of those by Standard and Poor's. That's worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
The cut will nevertheless increase political pressure on Chancellor of the Exchequer George Osborne, with the opposition Labour Party calling on him to scale back his fiscal squeeze as the economic recovery struggles to gain traction. "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," Mr. Osborne said in a statement in London. "Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it."
The pound fell after the downgrade in the last half-hour of trading in New York, dropping 0.6 percent to $1.5163. Sterling has depreciated 5.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.
"Ultimately, it's a fairly minor action and shouldn't result in a massive bond-market response," said Eric Lascelles, chief economist for RBC Asset Management in Toronto. "This is an era where developed countries are being downgraded on a regular basis."
Britain's debt as a percentage of gross domestic product will climb to 98 percent next year, from 90 percent last year and 95.4 percent in 2013, the European Commission said in its winter forecast Friday.
Mr. Osborne's austerity policies will squeeze the budget deficit to 6 percent next year from 10.2 percent in 2010, when his Conservatives took over in an unprecedented coalition with the Liberal Democrats, according to the predictions by the commission.
"Because of the combination of weak growth outlook, substantial fiscal challenges, high and rising debt burden and the deterioration in shock-absorption capacity, we see that the credit worthiness of the U.K. has deteriorated to a level that is more commensurate with Aa1 rating," Sarah Carlson, a senior credit officer at Moody's in London, said in a phone interview.
The U.K. economy shrank 0.3 percent in the fourth quarter of last year from the prior three-month period, leaving the country on the brink of an unprecedented triple-dip recession.
In his autumn statement Dec. 5, Mr. Osborne said he's no longer likely to meet his target to begin cutting the burden of government debt in 2015-16, after his fiscal watchdog cut its growth forecasts. S&P put the U.K.'s rating on a negative outlook a week later.
Fitch Ratings will conduct a further formal review of the rating in 2013 incorporating the budget, due March 20.