UK clings on to AAA rating

An influential credit ratings agency today said the UK was still worthy of its AAA rating but warned the eurozone debt crisis has left it less likely to cope with future shocks.

Moody's today confirmed the UK's top notch credit rating in its annual report on the country's finances, although it highlighted "formidable and rising challenges".

In particular, rising Government debt, the eurozone crisis and the weakening global economy mean the UK has "a reduced ability to absorb further macroeconomic or fiscal shocks without rating implications".

The news that the UK has clung on to its rating was welcomed by the Treasury. A downgrade by one of the big three credit ratings agencies would drive up the UK's borrowing costs, potentially jeopardising the Government's deficit reduction plans.

Moody's warned that the Government needs to stay on track with its fiscal consolidation if it is to retain its rating but warned that any additional weakening in the economic outlook or a need to prop up the banking system could temporarily derail the Government's efforts.

Moody's, which recently placed the credit ratings of all eurozone countries under review, said the UK was only partially cushioned from the crisis and warned no EU country was immune.

It added: "The outlook on the rating is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union."

However, it said the UK had "one of the most competitive of the large advanced economies in the world, and a track record of reversing increases in debt over many decades".

The independent financial watchdog, the Office for Budget Responsibility, which was set up by the coalition Government, had helped strengthen the country's fiscal institutions, it added.

A Treasury spokesman said: "We welcome Moody's assessment that the UK's AAA rating is on stable outlook.

"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".

PA