Moody's downgrades UK's credit outlook

Ed Conway, economics editor

Leading ratings agency Moody's has signalled it is poised to downgrade the credit rating on Britain's government debt, warning that Brexit has triggered an "erosion in institutional strength" that threatens the UK's financial credibility.

The ratings agency, which scores debt on the basis of how likely they are to default, changed the outlook on its Aa2 rating on the debt issued by the UK government from "stable" to "negative".

That implies a cut to the actual rating could be coming imminently.

At Aa2, Britain is on the same level as France but below Germany's AAA rating.

The downgrade would be seen as a particular blow for Chancellor Sajid Javid, coming barely more than 24 hours after he unveiled new fiscal rules designed to keep Britain's public finances in check after the election.

However, the ratings agency said that "no matter what the outcome is of the general election Moody's sees widespread political pressures for higher expenditures with no clear plan to increase revenues to finance this spending".

Moody's said neither of the main political parties in next month's election were likely to tackle high borrowing levels which Brexit had made even harder to fix.

In a toughly worded statement, Moody's said the fissures in Britain's society and politics exposed by its still-unresolved decision to leave the European Union would be long-lasting.

The ratings agency said: "It would be optimistic to assume that the previously cohesive, predictable approach to legislation and policymaking in the UK will return once Brexit is no longer a contentious issue, however that is achieved."

Moody's said Britain's £1.8trn of public debt - more than 80% of annual economic output - risked rising again and the economy could be "more susceptible to shocks than previously assumed".

Both the Conservatives and Labour have promised big spending increases ahead of next month's election.

Moody's said: "In the current political climate, Moody's sees no meaningful pressure for debt-reducing fiscal policies."

Prime Minister Boris Johnson called the 12 December election in an attempt to break the deadlock over how, and even if, the country should leave the EU, more than three years after the Brexit referendum.

Moody's said the "increasing inertia and, at times, paralysis that has characterised the Brexit-era policymaking process" showed how the UK's institutional framework has diminished.

The ratings agency said that even once Britain was out of the EU, uncertainty would remain because of the "significant challenges" of reaching a future trade deal with the bloc.

Any signs that Britain was unable to replicate the benefits of EU membership with trade deals in Europe and beyond would also be negative for the rating.

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A downgrade would be of slightly less sensitivity than under the era of George Osborne who pledged to maintain Britain's then AAA rating.

That was eventually downgraded in 2012 but a further reduction would nonetheless prove embarrassing for the Conservative Party.

Moody's said that "Brexit has been the catalyst for [an] erosion in institutional strength" which helped explain the change in outlook.

It said the main rationale for the change of view was firstly that "UK institutions have weakened as they have struggled to cope with the magnitude of policy challenges that they currently face, including those that relate to fiscal policy".

And second that "the UK's economic and fiscal strength are likely to be weaker going forward and more susceptible to shocks than previously assumed".