Falling Down: Moody's Downgrades U.K. Credit Rating

Moody's Investors Service announced Friday that it has downgraded Britain's government bond rating from the top AAA to AA1, citing “weaknesses in the economy's medium-term outlook,” as the Associated Press puts it.

“The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths,” the Moody’s report reads, “the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process.”

Moody's said that "a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the U.K.'s debt trajectory."

The report adds that "subdued" growth prospects and a "high and rising debt burden" were taking a toll on the British economy.

Here’s a GBP/USD (British pound versus U.S. dollar) chart showing the effect of Moody's announcement:

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Shortly after the downgrade was announced, the office of George Osborne, Britain’s Chancellor of the Exchequer, released the following statement:

Tonight we have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems.

Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.

We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs.

As the rating agency says, Britain faces huge challenges at home from the debts built up over many many years, and it is made no easier by the very weak economic situation in Europe.

Crucially for families and businesses, they say that ‘the UK's creditworthiness remains extremely high’ thanks in part to a ‘strong track record of fiscal consolidation’ and our ‘political will’.

They also make it absolutely clear that they could downgrade the UK’s credit rating further in the event of ‘reduced political commitment to fiscal consolidation’.

We are not going to run away from our problems, we are going to overcome them.

"The British government is in the midst of a program of spending cuts designed to reduce the nation's hefty deficit, but the austerity program has failed to stimulate economic growth," the AP notes.

Here's that Moody's announcement in full:

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