Moody’s puts UK’s AAA rating on negative outlook

‘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 … For the first time since these ratings began in 1978, the outlook for British debt has been downgraded from stable to negative.’

So said George Osborne when S&P placed Britain’s AAA credit rating on a negative outlook in May 2009, when Labour were in power. But guess what? Another credit-rating agency — Moody’s — has just done the same to our rating this evening. Given how much Osborne made of Britain being a ‘safe haven’, it’s rather a tricky one for him. There is now, officially, a one-in-three chance that our credit rating might be downgraded in the next eighteen months.

Why the negative outlook? In their press release, Moody’s mainly puts it down to uncertain growth and the effect that will have on fiscal consolidation. The uncertain growth is, they say, mainly due to three factors: the crumbling eurozone, the continuing effects of the financial crisis, and what they call a ‘commodity price driven hit to real incomes’. The Treasury in their response have, unsurprisingly, decided to focus on the first of these. It slightly helps their case that France and a few other European countries have also had their ratings adjusted — but, then again, countries like Germany, Holland and Sweden have not.

We shouldn’t get too excited just yet — not least because this isn’t a downgrade proper, and because downgrades didn’t stymie countries like America — but tonight’s news does highlight the fine line between stability and quandry. Only a few months ago, Osborne was apparently on course to meet his fiscal rules with some room to spare. Now the credit vultures are circling, and the Chancellor’s crucial task will be made that little bit harder should they decide to swoop.

I hope CoffeeHousers don’t mind me quoting myself, but I wrote about this gruesome future in the Times (£) several months ago. As I put it then:

‘So what will Mr Osborne do if his [second fiscal] rule is set to be broken, thereby jeopardising our AAA rating? The US approach, pioneered by the White House of Barack Obama, would be to dismiss the credit rating agencies as a bunch of inconsistent, know-nothing shysters. But our Chancellor cannot do that. He has already placed too much stock in the credit rating agencies, citing their judgments in support of his claim that our country is a “safe haven” against the onrushing financial storm. Instead, the only option is to go further in controlling the public finances. And that means billions more spending cuts and tax rises — austerity squared — as the election approaches in 2015. For so dedicated and meticulous a strategist as Mr Osborne, it will be a frightful prospect.’

This is now the main choice facing Osborne ahead of the Budget, if he wants to protect our AAA rating: does he do more to reassure the credit rating agencies? Or does he hold out a while longer, in the hope that our prospects for growth improve in the meantime? Either way, it’s safe to say that it wasn’t meant to be like this. The Chancellor is now facing the very dilemma that made him call for an election three years ago.

UPDATE: More self-quotation! Here are some quick, extra thoughts that I’ve already had on Twitter:

‘Negative outlook is tricky for Osborne, but worth remembering that Labour plans would probably have lost us our AAA rating already.’ ‘Another point: Osborne’s fiscal rules much more meaningful than Brown’s. Getting debt trajectory down by 2015 is pretty much a condition attached to our AAA rating by credit rating agencies. Osborne misses fiscal rule, we lose rating. Brown could just ignore his rules.’