Late on a cold, dark Friday night comes a bitter blow for the Chancellor: Britain has just been stripped of its triple-A credit rating by Moody’s.
George Osborne has set great store by that AAA badge. He was scornful when Labour was in power and the UK was warned it might be lost; and he was delighted when that warning was lifted soon after the Coalition came to power in 2010, saying it was “a big vote of confidence in the UK and … the Government’s economic policies.”
So is tonight’s loss of the rating a loss of confidence in those policies?
The statement Moody’s put out alongside its announcement is significant. It says the cut was in part due to the weak growth in our economy which it now expects to extend into the second half of the decade. It also highlights the fact that the austerity policies – the Chancellor’s efforts to bring the country’s huge borrowing needs under control - are taking longer that he forecast to work.
“The result is that the debt burden [will continue to grow as a proportion of the economy] until 2016,” says the agency, “which is substantially later than was expected a few years ago.”
Far from seeing this as a call to change tack and focus on growth instead of austerity, the Chancellor is interpreting it as all the more reason to stay the course.
He said in a statement:
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. Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.
Labour will see things very differently indeed.
And what of the economic significance? There will be some fallout: some funds which hold British debt will be forced to sell it if they have rules which only allow them to hold AAA-rated bonds. Some investors may take this as a cue to sell other investments they may have in the UK. The pound has taken a knock in late trade in New York. But experience suggests there won’t be a huge immediate impact.
France and the United States have both lost recently their top rating and the sky did not fall on their heads. Investors have known a downgrade of the UK was possible for some time and most will have prepared accordingly. More importantly the agencies are no longer regarded as oracles of wisdom after failing – in the opinion of many investors – to warn of the enormous credit risks which blew up in the crisis of 2007.
Instead, investors have been making their own judgement about whether Britain is likely to repay its debts and their verdict is still relatively rosy. Our Government’s borrowing costs are remarkably low, in part because we have a central bank that can still print money and a credible economic structure.
What tonight’s events show is just how fragile that judgement can be. More agencies may cut their rating of Britain and the Chancellor must convince the world of finance that his world of politics can deliver.