Financial News

  • 26 February 2013, 13:15

Govt Addresses MPs Over Credit Rating Slide

George Osborne has attacked Labour for creating an "economic mess" as he addressed MPs over the loss of the UK's prized AAA credit rating.

The Chancellor told the Commons last week's credit rating downgrade had not led to "excessive market volatility" and was "a stark reminder of the debt problem built up in Britain over the past decade".

But Labour shadow chancellor Ed Balls said Mr Osborne had failed to meet his own 2010 pledge to "safeguard Britain's credit rating" and accused him of "putting his own political pride" ahead of families and businesses.

Mr Osborne was greeted with calls of "resign" from the Opposition benches after Labour was granted an urgent question in the House of Commons.

He insisted he will not change course despite the setback and said: "We will go on delivering the economic plan that has brought the deficit down by a quarter."

The Chancellor was responding to Ed Balls amid the continued political and economic fallout of Friday's rating downgrade.

He suffered a serious reverse when credit agency Moody's revised downward its verdict on the UK economy - intensifying the pressure on sterling.

Ministers have played down the impact of the change on the Government's borrowing costs which had already been largely priced into the markets.

But Labour has hailed it as a "humiliation" for Mr Osborne, who previously declared that retaining the top-grade rating was a measure of the success of his austerity drive.

The pound slipped overnight following the UK's credit rating downgrade on Friday, but London's FTSE 100 opened higher as the week's trading began.

In Asia, sterling fell to a 31-month low against the dollar and a 16-month trough versus the euro, but the pound recovered slightly early on Monday, and by the close in Europe was down 0.17% against the dollar at $1.513.

The euro was up 0.99% at 86.04p, not far from its high of 87.75p.

In contrast to the currency market movements, reaction to the downgrade on other markets was muted with economists saying the move was expected and had already been priced in.

The FTSE 100 stock market closed up 19.67 points at 6355.37.

Fears that the downgrade would lead to a rise in the cost of borrowing by the UK Government also looked to be unfounded, with the price of British 10-year debt bonds falling beneath their level at the time of Friday's downgrade.

European economist Sarah Hewin at Standard Chartered said the move had already been taken into account.

"The market had anticipated that there would be a downgrade - perhaps the timing of it was a little earlier than expected," she told Sky News.

But she added that the outlook for the UK economy looks "pretty grim".

"The growth rate is struggling, and this was something that Moody's outlined in particular - It's the result partly of fiscal austerity, partly of a credit squeeze on the economy, partly the result of weak export markets.

"So it's going to be a long struggle, I think, back to recovery," she said.

Explaining Britain's downgrade from AAA to AA1, Moody's pointed to "subdued" growth prospects in the UK and a "high and rising debt burden".

It now expects the "period of sluggish growth" to "extend into the second half of the decade".

Ms Hewin said: "The good news is - if there is any good news in this story - is that Moody's outlook for the UK is stable.

"For now the greatest risk is that we see Standard & Poor's and Fitch following suit as well, moving the UK from their AAA rated status down to AA."

Following the move, senior Conservatives rallied round Chancellor George Osborne, predicting it would have little impact on the Government's borrowing costs.

But Tory backbenchers have upped calls for tax and spending cuts to kick-start growth, warning that next month's Budget is the "last chance saloon".

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