The credit ratings agency Moody's last night warned Britain faces "formidable and rising challenges" to its treasured AAA status, but said it was not yet considering a downgrade.
In its annual report on the UK, Moody's appeared to praise the Chancellor's austerity drive but said the increase in the deficit in recent years, plus the global economic crisis, were serious risks to the country's creditworthiness.
The report will come as a severe blow to the French government, which is expected to have its rating downgraded within days. Ministers in Paris, and even the head of France's central bank, have over the past week been arguing the UK should be downgraded rather than France.
The head of France's IMF regulator, Jean-Pierre Jouyet, last night said it would take "a miracle" for the country to avoid a downgrade.
Credit ratings are seen as crucial because they can affect the interest rate countries have to pay on their debts. The Treasury last night said: "The Government's deficit reduction plan has helped restore confidence in the UK economy and keep interest rates low. However, as Moody's report points out, the UK is not immune to the problems facing our trading partners in the euro area. The crisis is having a chilling effect across Europe and it is important that the euro area continues to take decisive action to fix their problems."
Moody's said Britain's AAA rating is "predicated on the country's significant structural strengths", including its proven record over many decades in reversing increases in debt and having a competitive economy.
However, it pointed out: "Its near-term macroeconomic outlook has weakened, and this will likely slow the pace of its fiscal consolidation,"
It added: "The significant increase in the UK Government's deficit and debt metrics since 2008, the weaker macroeconomic prospects and the risks emanating from the euro area crisis mean that the UK's stable AAA rating has a reduced ability to absorb further macroeconomic or fiscal shocks without rating implications."
It added that the currently stable outlook for the UK's AAA-status was in part based on the assumption that George Osborne will "stay on track" with his fiscal consolidation programme. The impact of that austerity could be affected, however, by any further weakening of the global economy or a need to support the banking system again.
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