The United Kingdom isn’t in danger of losing its top credit rating, Moody’s said Monday, citing a government belt-tightening pledge.
The rating agency, issuing its annual report on the world’s sixth-biggest economy, said the U.K. won’t soon return to its precrisis growth rate. It cited softness in the banking sector and the tattered finances of trading partners.
But Moody’s said it believes the government’s commitment to shoring up its balance sheet should allow the U.K. to weather a period of moderate growth without losing its gold-plated, triple-A rating.
“Moody’s believes that the U.K. has the wherewithal and ability to meet these challenges whilst maintaining its Aaa rating,” the rating agency said in awarding the U.K. a stable outlook, which means it doesn’t expect to change the rating in the foreseeable future.
The rating agency said it expects the U.K. to run a primary budget surplus – meaning tax revenue exceeds government spending – by 2014 under its baseline scenario, which calls for moderate growth and no further bank bailouts.
Moody’s comments come at a time when the Obama administration is under pressure for failing to tame the massive U.S. budget deficit. The top debate in Washington now is whether to extend the Bush tax cuts of 2001 and 2003, but former Fed chief Alan Greenspan – a longtime tax-cutter — urged the government last week to raise taxes and curb spending now or risk a crisis.
Though the financial crisis and years of overspending whittled away any cushion the U.K. government has to right its finances, Moody’s said the nation’s economy is strong enough and the political backing for cuts steady enough that the U.K. can achieve its goals.
It said that despite the problems in the U.K. economy, the nation scored well on the four-factor test the rating agency applies in sizing up the national stomach for austerity.
“The U.K. scores ‘very high’ for economic strength and institutional strength,” Moody’s said. “The country also scores ‘very high’ for government financial strength, and ‘very low – low’ on susceptibility to event risk.”
The report comes at a time when the U.K. government is able to borrow for 10 years at just above 3%, and has a management debt-maturity schedule, making a run on the pound look far fetched. Nonetheless, Moody’s warned that the U.K. could yet find itself in the soup should growth slow further or the financial sector run into problems.
