UK vulnerable to losing its AAA rating – BBH

According to Moody’s, the main drivers behind the latest cascade of downgrades were:

1) The uncertainty over (i) the euro area’s prospects for institutional reform of its fiscal and economic framework and (ii) the resources that will be made available to deal with the crisis.

2) Europe’s increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.

3) The impact that Moody’s believes these factors will continue to have on market confidence, which is likely to remain fragile, with a high potential for further shocks to funding conditions for stressed sovereigns and banks.”

The biggest surprise to the analysts at Brown Brothers Harriman, however, was that Moody’s cut the UK outlook from stable to negative, with the Pound sliding to hit a fresh 2-week low at 1.5715.

“We have long warned that the UK remains vulnerable to losing its AAA rating despite the fiscal tightening implemented by the Tory-led government. Note S&P cut its outlook to negative back in 2009, but then moved it back to stable in 2010 when the new Tory-led government pushed through austerity measures. It has gotten a pass from the agencies so far, but we think the slowing economy has brought focus back on the UK” the team at BBH says.

“We see UK downgrades in 2012, as we view AA+ France as a better credit than AA UK. With S&P downgrading France and Austria below AAA, we believe relative credit quality will require a cut to the UK in order to maintain consistency across countries. Eventually, we think S&P will follow Moody’s down the downgrade path” the team notes.

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