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British government claims loss of AAA rating proves need to pursue its austerity policies

By: Danica Kirka, The Associated Press

Posted: 02/25/2013 6:52 AM | Comments: 0 | Last Modified: 02/25/2013 12:55 PM

People queue at a money exchange bureau, in London, Monday, Feb. 25, 2013. The British pound fell sharply against other currencies before stabilizing somewhat on Monday as investors reacted to the downgrade of the U.K.'s cherished triple-A credit rating. (AP Photo/Kirsty Wigglesworth)

LONDON - The British government attempted Monday to cast as good a light as possible on the loss of the country's cherished triple-A credit rating, arguing it showed the need to press ahead with austerity measures to lower debt.

Treasury chief George Osborne had long boasted that the triple AAA rating validated his policies of spending cuts and tax hikes, but began backing off that argument as a downgrade became increasingly likely.

On Friday, Moody's pulled the trigger, cutting Britain's rating to AA1. It said sluggish economic growth would hinder the government's ability to control rising debt levels and deal with new financial shocks.

Osborne said the downgrade could not be blamed on his government's policies and underscored the need to stay the course.

"Ultimately that is the choice for Britain: we can either abandon our efforts to deal with our debt problems and make a difficult situation very much worse, or we can redouble our efforts to overcome our debts," he told lawmakers in the House of Commons.

The pound dropped to $1.5069 against the dollar — its lowest level since July 2010 — in early trading before recovering to $1.5125. Against the euro, it hovered around 18-month lows, with one euro worth 0.8711 pound.

Because it was the first such downgrade for Britain, which unlike the U.S. or France had managed to hold onto its top rating during the global financial crisis, the knee-jerk market reaction was negative. But experts said the rating cut was somewhat expected.

"It is hardly a bolt from the blue," said Jonathan Loynes, the chief European economics at Capital Economics. "Moody's had the U.K. on negative watch since February 2012."

Two other ratings agencies— Fitch and Standard & Poor's — have Britain on so-called negative outlook, signalling they could also downgrade it.

Government finances have struggled to recover as the economy has flat-lined in recent years. Public sector borrowing in December, for example, was higher than expected as government spending rose faster than income. The economy is close to falling into recession for a third time since the global financial crisis erupted.

Osborne, who abandoned his debt reduction target in a budget report in the fall, faced harsh comments in the House of Commons on Monday, with members of the opposition Labour party shouting "resign!"

He said the Moody's message was that the U.K.'s rating could be downgraded further if there was a reduced commitment to fiscal consolidation.

"We will go on delivering on the economic plan that has brought the deficit down by a quarter," he told lawmakers at a special session.

A downgrade theoretically means there is a greater risk that Britain may default on its debt. That could increase the cost for Britain to sell bonds and finance its debt, worsening its budget problems. But there are times it doesn't turn out that way.

When S&P downgraded the United States, it expressed concern that the America's political system would fail to deliver on plans to reduce the federal government's debt. But despite the warnings, investors still bought U.S. bonds, because economic turmoil in Europe and elsewhere made America's debt appear safer.

British government bonds were in fact stable on Monday, with the 10-year interest rate edging down 0.03 of a percentage point to 2.08 per cent. That suggests investors remain confident the country will be able to manage its debt in the longer-term.

Britain's total public sector net debt was 1.1 trillion pounds in December, or about 70 per cent of annual GDP.

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