UK's AAA Rating Under Threat, Warns Moody's

Britain's gold-plated credit rating is under threat from the crisis in the eurozone, a leading ratings agency has warned.

Moody's end-of-year assessment said the UK's AAA score was currently still safe but pointed to what it said were "formidable and rising challenges" ahead.

It has concluded Britain's ability to absorb further economic shocks while still keeping its stable outlook has deteriorated in the last year because of weak growth.

Analyst Sarah Carlson said: "Since the last annual report, the amount of headroom for Britain has declined."

The verdict is a blow for Chancellor George Osborne and the coalition, which is enforcing tough austerity measures in order to stabilise Britain's public finances in the long term.

Any downgrade in the rating would be an embarrassment for Mr Osborne but crucially would also drive up borrowing costs, which could jeopardise the already stuttering economic recovery.

The report has been published amid a row between France and Britain over the state of their economies, sparked by David Cameron's veto of an EU treaty to address the eurozone crisis.

Britain has so far still been backed by investors and yields on its 10-year bonds are near record lows at just above 2%.

Moody's said its "currently stable outlook" relied on the Government being able to stay on track with its plans to slash the deficit.

It warned: "Any additional weakening in the macroeconomic outlook or a need to support the banking system could temporarily set back the government's fiscal consolidation efforts.

"As a result, the outlook on the rating is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union."

Weak growth has already forced Mr Osborne to outline further austerity measures stretching beyond 2015 as he aims to erase the budget deficit.

The Treasury said the report showed the UK was not "immune to the problems facing our trading partners in the euro area".

A spokesman said: "The crisis is having a chilling effect across Europe and it is important that the euro area continues to take decisive action to fix their problems."

Britain has long been urging European leaders to fix the debt crisis in the eurozone but on Monday Mr Osborne refused to contribute to an International Monetary Fund bailout for the region.

The move came days after Mr Cameron refused to sign up to a new EU treaty aimed at easing the crisis after failing to win safeguards for the City of London.

Moody's did note that Britain is one of the most competitive large advanced economies in the world and has a track record for reversing debt increases over many decades.

"Its national currency and central bank provide the UK with substantial flexibility in developing responses to economic and financial shocks," the agency said.