AAA rating will take at least 10 years to regain

As the Chancellor tries to make light of Moody's downgrade, Mark Leftly assesses the fallout

Confronted by rising debt and sluggish economic growth, George Osborne is licking his wounds this weekend after the humiliating loss of the UK's AAA credit rating.

The Chancellor has long pointed to the fact that the world's biggest credit-rating agencies maintained their top-notch assessment of the British economy as an endorsement of his austerity programme.

That all changed late on Friday. Moody's reduced the country's credit-worthiness for the first time since its ratings began in 1978.

The agency said that Britain's economic recovery is proving slower than recessions in the 1980s and 1990s, and that tax revenue projections have been over-optimistic. Standard & Poor's, which is normally considered the most likely credit-rating agency to downgrade a nation, is expected to follow suit soon.

It is almost certain to take Britain at least 10 years to regain its status as an AAA nation, alongside the likes of Canada and Germany.

The Shadow Chancellor, Ed Balls, described the downgrade as "a catastrophic failure of economic policy", while Mr Osborne insisted that this only "redoubles" the coalition's intention to follow through with its deficit-cutting programme.

The downgrade comes at a difficult time for Mr Osborne, as he finalises details of next month's Budget and prepares for the arrival of the Bank of England's new governor, Mark Carney, this summer.

Losing the top credit rating is widely considered more of a blow to prestige than the economy, although it will make it slightly more expensive for the Government to borrow money. On the upside, sterling should weaken against the dollar and an increasingly stable euro, which would help exporters such as Rolls-Royce and AstraZeneca.

Thought to be more important is the reasoning behind Moody's decision, such as its judement 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".

In other words, the cuts are not yet working, and a credit crunch that officially started in August 2007 has years still to run.

Yannick Naud, who invests in government bonds at Glendevon King Asset Management, said: "If you look, by every economic indicator, the UK should not have been rated AAA anyway. Usually, if you lose a rating from one agency, you lose another one and it can take 10 to 18 years to get them back."

Canada lost its perfect rating with Standard and Poor's in 1992 and Moody's two years later, failing to regain its status with the agencies until 2002. That's the quickest that any country has lost and regained AAA ratings from both agencies. Australia took 17 years, from 1986 to 2003.

Even if Standard & Poor's resists a downgrade, history suggests that the UK won't regain Moody's full trust before 2021. Agencies are notoriously cautious in changing credit ratings, so as poorly as the economy needs to be performing to lose the AAA rating, it needs to grow just as exceptionally to get back on top.

This weekend, forecasters at the Office for Budget Responsibility, the body formed by Mr Osborne in 2010 to provide independent analysis of the UK's public finances, were accused of getting even their most basic numbers wrong.

Gerard Lane, investment strategist at Shore Capital, said: "I'm critical of the OBR for a lot of this. There was an assumption around consumers releveraging [borrowing to spend again] that was wrong, so growth forecasts were too high, tax numbers were too high. It could be that all the numbers are wrong. Unless we adopt the Germanic economic model, based on productivity and exports, then our standard of living is going to decline."

The Chief Secretary to the Treasury, Danny Alexander, moved quickly yesterday to downplay the significance of Moody's decision, arguing that credit-rating agencies are "not the be all and end all". This is at odds with what his boss in No 11 has said over the years.

In 2009, when in opposition, Mr Osborne called on the then Prime Minister, Gordon Brown, to take the country to the polls after Standard & Poor's put the UK in "negative outlook", which is often a precursor to a downgrade. He said then: "It's now clear that Britain's economic reputation is on the line at the next general election, another reason for bringing the date forward and having that election now."

A year after taking office, the UK was taken off that negative outlook, which Mr Osborne claimed was "thanks to the policies of this coalition government" and was proof that "Britain has economic stability again". As recently as last July, he stated that the AAA rating showed that "despite the economic problems we face, the world has confidence that we are dealing with them".

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Guru Careers: Investment Writer / Stock Picker

Competitive (Freelance) : Guru Careers: An Investment Writer / Stock Picker is...

Day In a Page

How to stop an asteroid hitting Earth: Would people co-operate to face down a global peril?

How to stop an asteroid hitting Earth

Would people cooperate to face a global peril?
Just one day to find €1.6bn: Greece edges nearer euro exit

One day to find €1.6bn

Greece is edging inexorably towards an exit from the euro
New 'Iron Man' augmented reality technology could help surgeons and firefighters, say scientists

'Iron Man' augmented reality technology could become reality

Holographic projections would provide extra information on objects in a person's visual field in real time
Sugary drinks 'are killing 184,000 adults around the world every year'

Sugary drinks are killing 184,000 adults around the world every year

The drinks that should be eliminated from people's diets
Pride of Place: Historians map out untold LGBT histories of locations throughout UK

Historians map out untold LGBT histories

Public are being asked to help improve the map
Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue