Did Moody’s downgrade Chancellor Osborne?

Shame Berlusconi’s antics and his political comeback is so crude a reminder of the feeble stability in the eurozone. But it’s not just the ongoing Italian election. From scandals in the Vatican to the Oscar awards, there seems to be a long array of news under which Chancellor George Osborne can easily shelter after the downgrade of UK’s government debt by ratings agency Moody’s.

On one hand, it is true that the slip to Aa1 has shocked no one in the markets. In Madrid, BBolsa analysts said Monday in an investor note: “Moody’s took the UK out of the Triple A club, where it had stood for too long as its fundamentals did not justify the previous top investment grade.” In London, Barclays described Moody’s decision as “a torrid start to the new year for the UK economy,” yet researchers added “it does not come as a surprise.”

At midday, the change on the 10-year sovereign bond’s yield was of a mere +0.01 point, making it really hard for the Labour opposition to call on Osborne’s failed economic policies.

Of course, they did it, nevertheless. Ed Balls MP, Labour’s shadow chancellor, spoke of “a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility.”

In fact, this is reading that is gaining momentum even in the Square Mile. At investment management house Schroders, economist Azad Zangana today pointed out, too, that the fallout of the downgrade “is more likely to be felt in Westminster rather than the City, where Chancellor George Osborne has used the ‘AAA’ rating as a benchmark for economic competence.” And so a right–if late-coming–warning awaits a fair acknowledgement in danger of being swept by Osborne’s refusing any admission of guilt.

It’s time to reassess the situation the UK finds itself in: 11 Downing Street (the Chancellor’s residence) had promised to cut down the ratio of public debt per GDP by 2016, but now Moody’s expects it to reach 96 percent in three years while the Office of Budget Responsibility’s forecasts look worse, 97.4 percent in 2015.

The medium-term outlook for the British economy is weak, and this lack of growth keeps burning the energy the Coalition government puts into fighting its deficit. Or, in Moody’s’ words, “the country’s current economic recovery has already proven significantly slower compared with the recovery observed after previous recession, such as those of the 1970s, early 1980s and early 1990s.” The agency, by the way, also included a slap across the face of the recent Funding for Lending Scheme, whose “potential to support a surge in growth […] remains skewed to the downside.”

The two possible responses from Chancellor Osborne and Prime Minister David Cameron are well known: they could either use again the eurozone card as a scapegoat, or face the music. The choice may not be available for much time, anyway. According to the latest Scottish Widows’ savings and investment report, nearly a third (32%) of British people have cash reserves with which they would be unable to afford the UK average combined monthly mortgage and council tax costs (£1,009).

About the Author

Victor Jimenez
London contributor at thecorner.eu, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.

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