Farewell AAA: Moody"s Downgrades The UK From AAA To Aa1

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Just the headline for now:

• MOODY’S DOWNGRADES UK’S GOVERNMENT BOND RATING TO Aa1 FROM AAA

Someone must have clued Moody’s on the fact that the UK is about to have its very own Goldman banker, which means consolidated debt/GDP will soon need four digits. In other news, every lawyer in the UK is now celebrating because come Monday Moody’s will be sued to smithereens.

Full report below:

Moody’s downgrades UK’s government bond rating to Aa1 from Aaa; outlook is now stable
 
London, 22 February 2013 — Moody’s Investors Service has today downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa. The outlook on the ratings is now stable.
 
The key interrelated drivers of today’s action are:
 
1. The continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which Moody’s now expects will extend into the second  half of the decade;
 
2. The challenges that subdued medium-term growth prospects pose to the government’s fiscal consolidation programme, which will now extend well into the next parliament;
 
3. And, as a consequence of the UK’s high and rising debt burden, a deterioration in the shock-absorption capacity of the government’s balance sheet, which is unlikely to reverse before 2016.
 
At the same time, Moody’s explains that the UK’s creditworthiness remains extremely high, rated at Aa1, because of the country’s significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.
 
The stable outlook on the UK’s Aa1 sovereign rating reflects Moody’s expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK’s debt trajectory. Moreover, although the UK’s economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK’s independent monetary policy framework and sterling’s global reserve currency status.

In a related rating action, Moody’s has today also downgraded the ratings of the Bank of England to Aa1 from Aaa. The issuer’s P-1 rating is unaffected by this rating action. The rating outlook for this entity is now also stable.
 
RATINGS RATIONALE
 
The main driver underpinning Moody’s decision to downgrade the UK’s government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK’s economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process. Moody’s says that the country’s current economic recovery has already proven to be significantly slower — and believes that it will likely remain so — compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s. Moreover, while the government’s recent Funding for Lending Scheme has the potential to support a surge in growth, Moody’s believes the risks to the growth outlook remain skewed to the downside.
 
The sluggish growth environment in turn poses an increasing challenge to the government’s fiscal consolidation efforts, which represents the second driver informing Moody’s one-notch downgrade of the UK’s sovereign rating. When Moody’s changed the outlook on the UK’s rating to negative in February 2012, the rating agency cited concerns over the increased uncertainty regarding the pace of fiscal consolidation due to materially weaker growth prospects, which contributed to higher than previously expected projections for the deficit, and consequently also an expected  ise in the debt burden. Moody’s now expects that the UK’s gross general government debt level will peak at just over 96% of GDP in 2016. The rating agency says that it would have expected it to peak at a higher level if the government had not reduced its debt stock by transferring funds from the Asset Purchase Facility — which will equal to roughly 3.7% of GDP in total — as announced in November 2012.
 
More specifically, projected tax revenue increases have been difficult to achieve in the UK due to the challenging economic environment. As a result, the weaker economic outturn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, and is likely to continue to do so over the medium term. After it was elected in 2010, the government outlined a fiscal consolidation programme that would run through this parliament’s five-year term and place the net public-sector debt-to-GDP ratio on a declining trajectory by the 2015-16 financial year. (Although it was not one of the government’s targets, Moody’s had expected the UK’s gross general government debt — a key debt metric in the rating agency’s analysis — to start declining in the 2014-15 financial year.) Now, however, the government has announced that fiscal consolidation will extend into the next parliament, which necessarily makes their implementation less certain.
 
Taken together, the slower-than-expected recovery, the higher debt load and the policy uncertainties combine to form the third driver of today’s rating action — namely, the erosion of the shock-absorption capacity of the UK’s balance sheet. Moody’s believes that the mounting debt levels in a low-growth environment have impaired the sovereign’s ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody’s has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.
 
In summary, although the UK’s debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other Aaa-rated issuers.
 
RATIONALE FOR STABLE OUTLOOK
 
The stable outlook on the UK’s Aa1 sovereign rating partly reflects the strengths that underpin the Aa1 rating itself — the underlying economic strength and fiscal policy commitment which Moody’s expects will ultimately allow the UK government to reverse the debt trajectory. The stable outlook is also an indication of the fact that Moody’s does not expect further additional material deterioration in the UK’s economic prospects or additional material difficulties in implementing fiscal consolidation. It also reflects the greater capacity of the UK government compared with its euro area peers to absorb shocks resulting from any further escalation in the euro area sovereign debt crisis, given (1) the absence of the contingent liabilities from mutual support mechanisms that euro area members face; (2) the UK’s more limited trade dependence on the euro area; and (3) the policy flexibility that the UK derives from having its own national currency, which is a global reserve currency. Lastly, the UK also benefits from a considerably longer-than-average debt-maturity schedule, making the country’s debt-servicing costs less vulnerable to swings in interest rates.
 
WHAT COULD MOVE THE RATING UP/DOWN
 
As reflected by the stable rating outlook, Moody’s does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK’s debt burden during the multi-year fiscal consolidation programme. Moody’s could also downgrade the UK’s government debt rating further in the event of an additional material deterioration in the country’s economic prospects or reduced political commitment to fiscal consolidation.
 
Conversely, Moody’s would consider changing the outlook on the UK’s rating to positive, and ultimately upgrading the rating back to Aaa, in the event of much more rapid economic growth and debt-to-GDP reduction than Moody’s is currently anticipating.
 
COUNTRY CEILINGS
 
The UK’s foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.
 
IMPACT ON OTHER RATINGS
 
Moody’s will assess the implications of this action for the debt obligations of other issuers which benefit from a guarantee from the UK sovereign, and will announce its conclusions shortly in accordance with EU regulatory requirements. Moody’s does not consider that the one-notch downgrade of the UK sovereign has any implications for the standalone strength of UK financial institutions, or for the systemic support uplift factored into certain UK financial institutions’ unguaranteed debt ratings.
 
PREVIOUS RATING ACTION

Moody’s previous action on the UK’s sovereign rating and the Bank of England was implemented on 13 February 2012, when the rating agency changed the outlook on both Aaa ratings to negative from stable. For the UK sovereign, the actions prior to that were Moody’s assignment of a Aaa rating to the UK’s government bonds in March 1978 and the assignment of a stable outlook in March 1997. For the Bank of England, the action prior to the one from February 2012 was the assignment of a Aaa rating and stable outlook in March 2010.

Zero Hedge

Farewell AAA: Moody"s Downgrades The UK From AAA To Aa1

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North Korea attacks; American peace groups quickly react by not organizing antiwar marches, not burning DPRK flags, not painting Hitler mustache on effigies of Kim Jung Il, and not chanting “peace now”

Hollywood refuses to brand Kim Jung Il war monger and lying liar, sends Oliver Stone on fact-finding mission

Study: a Google search for body count website listing civilian deaths in Korea brought no results

Study: no Social Security reform will be needed if gov’t raises retirement age to at least 814 years

Irish economy in a shambles but who cares; St Patrick�s day is only 4 months away

Obama to cut Medicare as soon as debt panel finds a way to blame it on Republicans

Aging Democratic Party Politburo refuses to give way to younger apparatchiks

Soros escape pod seen over Los Angeles; clueless Pentagon denies ‘action by U.S. adversary,’ searches ocean bed for hatches and trap doors

Just in: fall of USSR result of not speaking to people effectively, teleprompters not having been invented yet

Obama to America: “Mumbai is awesome! Wish you were here. Wire money”

Obama’s final appeal to voters: Have the courage and integrity to rubber stamp my rubber stamps!

Obama distances from himself in Charlottesville to woo Virginia voters

Juan Williams hired by Fox News to represent liberals; show titled You’ve seen Juan, you’ve seen ‘em all

Google expands maps and street views to include Google Colonoscopy: zero in on target and get detailed view with few clicks of mouse. New program supported by several gov’t agencies, most notably IRS

New polling indicates American voters no longer want change, they just want their money back

Democrats launch “Take Our Jobs” campaign as only seven Americans agreed to vote for them

Obama ends war, blames Iraq car explosions on faulty non-union manufactured spare parts

Democrats pull troops out of Iraq to fight the ‘real war’ on Christine O’ Donnell

In effort to appeal to NOW feminists, Christine O’Donnell changes name to Rosie, gains 400lbs

Obama goes to church, worships self

Study: Obama’s threat to butn tax money in Washington ‘recruitment bonanza’ for Tea Parties

GOP: a Rove by any other name still smells the same

Imam Rauf finds a peaceful solution: ‘Move Ground Zero a few blocks away from the mosque and no one gets hurt’

New Yorkers to Rauf: ‘move mosque to Mecca; Ground Zero at location can be arranged’

Modernizing Islam: New York imam proposes to canonize Saul Alinsky as religion’s latter day prophet

General Petraeus: non-halal meals, uncovered female Americans endanger U.S. troops

U.S. forces in Afghanistan brace for backlash after President’s message on Rosh Hashana and Yom Kipur

Cardboard cutouts used to fill empty seats for Obama’s appearance as Obama takes credit for creating jobs in cardboard-cutout sector

Taliban commanders warn that a plan to build Ground Zero mosque could provoke violence against their troops and operatives overseas

MSNBC suggests Florida church burn Bible instead of Koran; fewer pages mean smaller carbon footprint

New York Neighbors for American Values offer to voluntarily behead themselves to prove tolerance to Muslims; rabbi Arthur Waskow offers to self-incinerate in oven instead

The U.N. posthumously awards all French military personal that served during May of 1940 a medal for Courageous Restraint

White House revises policy to announce when President is at work instead of announcing when he is going on vacation

Seattle: sonic booms of fighter jets shatter glass, stimulate economy

Obama promises to create thousands more economically neutral jobs

White House: Spanish vacation saved or created 3,427 jobs

Pelosi issues recall of House, citing electoral safety concerns

Obama’s lack of cojones a bold-face lie: proof

Elton John Working On Anti-Obama Musical

Congress ceases Pentagon spending, outsources armed forces to China

Shirley Sherrod accepts apology, gets new gov’t job in End of Life Counseling

On first visit as Britain’s PM, David Cameron chooses a communist state, seeks détente

Report: President Obama to visit the United States in the near future

GOP challengers promise post-racial presidency after 2012

Doctors: Glenn Beck’s worsening eyesight and inability to focus give hope he may yet join other media and follow Obama

Parachuting donkey lands into Vice President’s desk, continues business as usual

Obama calls on radical groups to comply with rules for radicals

NAACP condemns racism within al Qaeda: ‘We don’t have a problem with radicals, we have an issue with their acceptance of white Arab supremacists into their organizations’

Obama denies al-Qaeda stimulus money, redirects funds to ‘less racist’ man-made disaster management organizations

In view of lasting heat wave, all weather forecasts are temporarily replaced with ‘An Inconvenient Truth’ infomercials

NAACP strongly denounces The New Black Panthers

Caught in another hateful rant, Mel Gibson apologizes to representatives of hurt communities: Russian mail-order bride community, silicone breast-implant community, slutty clothes designer community, Vegas whore community, rapist community, and personally to Al Sharpton

Europe: Oracle Octopus predicts World Cup winner;
USA: Oracle Dodo predicts economic growth

Today’s box office: LeBron knixes New York in a suspense thriller The Field of Nightmares (Tax Them and They Won’t Come)

In a last-ditch effort to get popular with Americans, Supreme Court nominee Elena Kagan reveals she’s a Russian spy, photoshops her face on Anna Chapman’s nude photos, wins by a landslide

Portland Tribune to receive Pulitzer Prize for best investigative non-reporting of Al Gore’s sexual public service blooper

War on Arizona turns to quagmire; Obama sets timetable on American withdrawal by 2011

MSNBC: Obama’s firing McChrystal a positive move to bring long-awaited improvement in oil-spill-affected news coverage

Harry Reid changes name to John F Kennedy in last ditch effort to win re-election

White House spokesman Gibbs clarifies why President’s answers to nation’s problems seem surreal, bizarre and inappropriate, by comparing reporter’s question to a purple polka-dotted people-eater riding a tricycle

Obama: green economy likely to transform America into a leading third world country of the new millennium

President taps Pay Czar for BP payouts to victims: Unions order freighter of champagne

EPA: New climate bill will cost less than a postage stamp a day to those still able to afford a postage stamp

Helen Thomas Gets “Rachel Corrie Golden Bulldozer Award“

Puzzled media: Apparently, Al Gore is pro-drill

Gay Pride parade in Gaza cancels inclusion of Israeli group

Obama blames Bush for screwing up his ‘Don’t Make Excuses’ grad speech in Kalamazoo, Michigan

Helen Thomas to leave US for ancestral Lebanon to no longer be occupier of La Raza’s Land

Following phrase scheduled to appear on every Sunday morning news show: ‘What Helen actually ment to say was…’

Helen Thomas to be inducted into Museum of Natural History

Obama’s Deficit Reduction Commission operating in the red

Al Gore: It’s a shame that a family can be torn apart by something as simple as a pack of polar bears

Democrats introduce bill regulating who can be a politician

BP hires Gaza flotilla peace activists to beat oil back into hole

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