The UK lost its top credit rating by Moody’s Investors Service which cited continuing weakness in the growth outlook and the challenges that presents to the Coalition’s fiscal consolidation programme.

The rating was lowered to AA1 and the outlook on the country’s debt changed to stable, said Moody’s. With the UK’s high and rising debt burden, a deterioration in the government’s balance sheet is unlikely to be reversed before 2016, Moody’s indicated.

Fiscal squeeze

The cut will increase pressure on chancellor of the exchequer George Osborne, with the opposition Labour Party calling on him to scale back his fiscal squeeze as the economic struggles.

Mr Osborne insisted Britain would not “run away” from its problems after the downgrade was announced. The chancellor said the coalition was determined to stick by its plan for economic recovery.

“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,” he said.

“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,” he continued.

“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’.”

Growth forecasts

Investors often ignore such downgrades, as evidenced by the drop in French 10-year bond yields following a downgrade last year and a rally in treasuries after the US lost its top rating at Standard and Poor’s in 2011.

– (Bloomberg/PA)