Q&A: UK credit rating downgrade

Moody's logo Moody's credit rating agency rates countries on their ability to pay back loans

Related Stories

The UK has lost its triple-A credit rating for the first time since the 1970s. Moody's, one of the three biggest credit rating agencies in the world, has downgraded its assessment of the outlook for the UK economy.

Its more negative view of how long it will take to recover from the downturn will increase pressure on Chancellor George Osborne just weeks before the Budget. But what does this downgrade mean - and does it matter?

What is a credit rating?

Credit ratings are issued by credit rating agencies, private companies who sell their financial analysis to investors.

They mark potential investments using a scorecard system and each agency uses different ones.

The main one used by Moody's goes from Aaa to C. The UK was moved down one step on the scale from Aaa to Aa1.

In the case of countries, agencies are assessing their creditworthiness - their ability to pay back money lent to them.

The less likely a country is to be able to pay back its debts, the lower the rating.

Why has the UK lost its AAA rating?

Moody's now expects that economic growth will be "sluggish" into the second half of the decade.

This means it will take longer for the government to reduce its budget deficit - the amount it has to borrow every year because it is spending more than it receives in tax revenue.

The lack of growth makes cutting the deficit more difficult because when an economy is not growing, less tax is coming in from companies and individuals, while the government has to spend more on welfare payments, such as unemployment benefit.

And as the UK's debt problem will take longer to get under control, there will be a deterioration of the country's "shock-absorption capacity".

In other words, it will make it harder for us to cope with any external problems, such as a worsening of the crisis in the eurozone, our main trading partner.

There were some positive remarks, too, however.

Moody's said the UK's creditworthiness was still "extremely high". It pointed to strengths such as a highly competitive economy and a strong track record in being able to get debt under control.

Does the downgrade matter?

It looks as though it will continue the decline in the value of sterling, as investors move their money into currencies used by countries with better growth prospects.

A weaker pound would help exporters, but it also makes imports more expensive.

We have already seen the price of petrol go up over the past month and further increases like these could put more pressure on household incomes and company profits, and therefore on economic growth as a whole.

In theory, a lower credit rating could also make it more expensive for the UK to borrow money.

It works in a similar way to when you are borrowing from a High Street bank. If you are in a well-paid job and are living within your means, you will have to pay a lower interest rate on a loan than someone who the bank thinks is overstretched and may have difficulty keeping up with the repayments.

And this matters, as the UK currently needs to borrow more than £100bn a year from investors, both at home and around the world.

However, after the US lost its AAA rating in 2011, the amount it had to pay to borrow actually went down, as investors still viewed the country as one of the safest bets in the world.

What's more, some have said that the agencies are just stating what was already clear - that the UK's economic problems, in line with many other countries, will take longer to resolve than expected.

It is also important to point out that the credit rating agencies themselves lost credibility after the financial crisis, when they were found to have given top ratings to investments that turned out to be worthless.

What does it mean for the government?

Politically, the downgrade could be much more significant.

Labour was quick to describe it as a "humiliating blow" for the government.

This is because, throughout his time as Chancellor, George Osborne has used the threat of a downgrade as a justification for the scale and speed of deficit-cutting measures.

When others said he should pull back on spending cuts and tax rises, because of the possible negative impact on the country and the economy, the chancellor cited the need to maintain credibility in the eyes of the markets. They needed to be convinced that the government was serious about getting its finances under control, he said.

It was seen as an achievement that the UK was one of only three major industrialised nations to maintain a triple-A rating from all agencies - Canada and Germany being the others.

So will the government now change its economic policy?

Not according to George Osborne.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said in response to Moody's announcement.

"We will go on delivering the plan that has cut the deficit by a quarter."

Others, however, will see the downgrade - and Moody's suggestion that recovery may not come until after 2015 - as a reason to reduce borrowing more slowly and to focus on measures to boost jobs and growth.

More on This Story

Related Stories

More Business stories

RSS

Business Live

  1.  
    Crazy prices Via Email Laith Khalaf senior analyst, Hargreaves Lansdown

    The 10-year UK government bond (gilt) yield has fallen to a historic low of 1.4%. "'You don't have to be mad to buy gilts, but it helps. Rational investors wouldn't touch gilts at this level, but reason is pretty much out the window when central banks are sporadically firing bazookas at government bond markets... Falling inflation, lower growth expectations, and of course the ECB bond-buying programme are the most likely culprits for the fall in bond yields."

     
  2.  
    12:00: Tax returns

    Time to get your skates on if you haven't yet done your self-assessment tax return. The deadline for online returns is the stroke of midnight tomorrow. You can probably think of better ways of spending your Saturday - if you have £100 to burn on an HMRC penalty. However, if you're really stuck, there are exceptions.

     
  3.  
    11:45: Nut rage
    nut rage

    Nut rage is back in the news. A court in South Korea is deciding if a former senior executive at Korean Air should be punished under laws designed to deter hijackings. Cho Hyun-ah, the daughter of the chairman of Korean Air, ordered one of its airliners back to the departure gate to eject a cabin attendant who served her nuts in a bag, not in a bowl. She could face ten years in prison if convicted of diverting a flight, and is also accused of assaulting two cabin crew.

     
  4.  
    11:30: Begrudgery World Service

    "Nigerians always talk about what other countries have done." Nigerian government minister Osita Chidoka, responding to Business Correspondent Russell Padmore who said Ireland is often seen a nation of begrudgers, so could Nigeria be the same? Listen to Business Update: http://bit.ly/1yD7IO1

     
  5.  
    11:15: Chip 'n' pain Rory Cellan-Jones Technology correspondent
    Rory gets his chip

    One not to miss today: intrepid technology correspondent Rory Cellan-Jones gets himself chipped so he can do some photocopying. "First, he massaged the skin between my thumb and index finger and rubbed in some disinfectant. Then he told me to take a deep breath while he inserted the chip. There was a moment of pain - not much worse than any injection - and then he stuck a plaster over my hand." We may stick with our plastic ID cards.

     
  6.  
    11:00: Russia rate cut
    RUBGBP

    There's been quite a sharp fall in the rouble against the dollar and the pound following Russia's interest rate cut. A dollar is buying around 70.84 roubles, a 2.4% fall for the Russian currency. One pound will now get you around 106.6 roubles, which is about a 3.1% fall for the rouble.

     
  7.  
    Russia rate cut Via Twitter Andrew Walker BBC World Service Economics correspondent

    tweets: Russian central bank cuts interest rate - 15% from 17% due to "stabilisation of inflation and depreciation expectations"

     
  8.  
    10:41: German beer
    Oktoberfest

    Among general eurozone gloom, a bright spot for German breweries, who saw their first increase in sales volume in 2014 after seven years of declines. The Federal Statistical Office said overall sales of German beer in 2014 were 9.56 billion litres (about 16.8 billion UK pints), an increase of 1% over 2013.

     
  9.  
    Fridgeonomics Via Blog Linda Yueh Chief business correspondent

    After a five-year effort, Unilever tells me that it has achieved zero waste in all of its 240 factories in 67 countries worldwide. It says that it generates efficiency savings of €200m a year by eliminating disposal costs. Read more of Linda's blog on the website.

     
  10.  
    10:14: Housing minister Radio 5 live

    Housing Minister Brandon Lewis was on 5 live talking about house building. "I'm not a fan of targets," he says. Less regulation for small building projects is helping building, he adds. If we are short of housing, why the rise of detached houses? "We've had a period of [building] lots of apartments of flats... we need homes as well."

     
  11.  
    10:00: Rental prices
    ONS

    The graph above, courtesy of the ONS, shows the trend of percentage increases in rental prices. After rises nearing 3% in 2012, the dip to 1.5% may well have ended.

     
  12.  
    09:43: Rental prices
    rents

    Private rental prices paid by tenants in Great Britain rose by 1.7% in 2014, according to the Office for National Statistics. A 2% rise in Scotland led the charge, while English rents grew 1.8%, and 0.2% increases were logged in Wales. As can be seen, London rent rises have outgunned the rest of the country.

     
  13.  
    09:32: Bank of England lending data

    Mortgage approvals rose in December for the first time since June, the Bank of England said. This could mean that a steady reduction in home loans could be ending. There were 60,275 mortgage approvals last month, up from 58,956 in November.

     
  14.  
    Via Twitter Richard Westcott BBC transport correspondent

    tweets: BBC News - Crossrail makes tunnel breakthrough under Liverpool Street Station

     
  15.  
    09:12: Plane order
    ana

    All Nippon Airways has placed an order with a list price of $2.2bn (£1.46bn) for 15 planes from Boeing and Airbus. The Japanese flag carrier is looking to expand routes at Tokyo's central Haneda airport. The airline said it would acquire eight planes from US-based Boeing and seven from fellow duopolist Airbus.

     
  16.  
    08:54: Eurozone crisis
    Alexis Tsipras

    Watch out for Greek fire. Or, continuing the Greek theme, maybe we'll see the golden mean. The prime minister who heads the nation's new anti-austerity government, Alexis Tsipras, has it in his diary to meet Jeroen Dijsselbloem, the current head of the eurozone group of finance ministers today to discuss the conditions of Greece's massive bailout.

     
  17.  
    BT results 08:37: Via Twitter Rory Cellan-Jones Technology correspondent

    tweets: BT says ultrafast coming within a decade - but will it look that fast in 2025?

     
  18.  
    08:29: Honda
    honda

    Honda cut its annual operating profit forecast by 6.5%. It has set aside more cash to cover its recall of cars to replace potentially faulty air bags. It now expects an operating profit of 720 billion yen (£4.1bn) for the year to March 31. It previously forecast 770 billion yen.

     
  19.  
    08:16: Paper review
    papers

    The Guardian splashes on a report from the Institute for Fiscal Studies which claims young workers have been hit hardest by a squeeze in standards of living. The FT digests Shell and US rival ConocoPhillips's investment cancellations. The Wall St Journal says bets against currency pegs, like Denmark's krone with the euro, are on the rise following Switzerland abandoning theirs. The Telegraph reports on a likely windfall for gas companies as wholesale costs drop.

     
  20.  
    Google results Via Twitter Stephen Shankland Senior writer at CNET News

    tweets: Google's capital expenditures jumped $1.13 billion sequentially to $3.55 billion in 4Q2014. Data centers ain't cheap.

     
  21.  
    07:50: Market update

    Japan's Nikkei index added about 0.4%, clawing back some of the 1.1% lost yesterday, while the Hong Kong Hang Seng index dropped 0.1%, to 24,570.01. Japanese factory output rose 1% from the previous month, below forecasts, while household spending fell more than expected, down 3.4% on a year ago.

     
  22.  
    07:33: PPI investigation

    The Financial Conduct Authority, the City watchdog, is planning to "gather evidence on current trends in complaints on payment protection insurance," it says. It could then decide to do an advertising campaign, a time limit on complaints or keep things as they are.

     
  23.  
    07:25: BT results

    BT have updated everyone on their pension fund situation and how they will deal with a £7bn deficit. BT will pay £1.5bn into the fund by the end of April 2015. This will be followed by £250m in each of the years to March 2016 and March 2017. Low interest rates have hit the fund.

     
  24.  
    07:16: Qatar Airways
    Qatar Airways plane

    Qatar Airways has acquired stake of just less than 10% in BA and Iberia-owner IAG. There's a cap on non-EU ownership of European airlines, but Qatar Airways might up its stake in future, it says.

     
  25.  
    07:05: BT results

    BT says third-quarter earnings before tax and interests costs rose 2% to £1.57bn. Gavin Patterson, chief executive says: "All the major communications providers are responding to the strong market demand for fibre broadband, helping to drive take-up in what is already a very competitive market."

     
  26.  
    06:57: US growth data BBC Radio 4

    US growth figures will be reported later on. What's the likely result, Today asks Ewen Cameron Watt of Blackrock? "The rate of growth is slowing a little bit but not enough to raise serious concerns," he says. Expect a "stable but robust rate of growth."

     
  27.  
    06:45: Greece Radio 5 live
    Greece

    Guntram Wolff is the director of European think tank Bruegel, and he's on 5 live, talking about Greece. "It was a mistake that Greece joined the euro, but it would now be a mistake for it to leave," he says. "We will have to come to a deal that will have a lower burden on Greece. I essentially think you will keep the nominal amount [owed to bond investors] but you will increase the maturity.. from 30 to 40 or 50 years."

     
  28.  
    06:30: Amazon results Radio 5 live

    More from Ewen Cameron Watt of investment manager Blackrock on 5 live. He is giving his views on US results overnight. "Amazon and Google both essentially reported that underlying demand over Christmas was pretty decent," he says. After tax, margins at Amazon are below 1%, he says.

     
  29.  
    06:20: Trademark news Radio 5 live
    swift

    The phrases "this sick beat" and "nice to meet you, where you been" have been trademarked by singer Taylor Swift, 5 live reports. Laura Harper of law firm Shoosmiths says she is trying to stop other people making money by putting the phrases on a t-shirt or other merchandise. She will have to prove the phrases are "synonymous" with her, she says.

     
  30.  
    06:09: Shell results Radio 5 live
    shell

    Ewen Cameron Watt of Blackrock is the markets guest on 5 live, talking about yesterday's results from Shell. "These are very historic results because they reflect an average price of $75" per barrel of oil, he says. Bearing in mind oil is below $50 today, "the pain is yet to come," he adds. The firm has cut $15bn of investments. The longer the price remains at this level, the more likely more investment cuts will come, he says.

     
  31.  
    06:01: House building Radio 5 live

    Figures from the National House Building Council show there was a 9% rise in homes built last year to 145,174, but the rise missed the government's 200,000 home target. Peter Vella of Countryside Properties is on 5 live. NHBC's figures don't take into account all homes started or built, so the industry could be closer to the target than thought.

     
  32.  
    06:00: Howard Mustoe Business reporter

    Good morning all. Overnight, online retail giant Amazon has reported weaker profits for the busy Christmas period. Stay tuned for the best business and economics news and get in touch via email bizlivepage@bbc.co.uk or on twitter @BBCBusiness

     

Features

From BBC Capital

Programmes

  • A car being driven by Cruise Automation technologyClick Watch

    The tech which could allow any car with an automatic gearbox to become self-driving

Copyright © 2015 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.