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 rise 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.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in September 2008. Please see the Credit Policy page
on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings of rated entity United Kingdom, Government of were initiated
by Moody's and were not requested by the rated entity
All rated entities or their agents participated in the rating process.
The rated entities or their agents provided Moody's access to the books,
records and other relevant internal documents of the rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Sarah Carlson
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Bart Jan Sebastian Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades UK's government bond rating to Aa1 from Aaa; outlook is now stable
