Moody's Downgrades UK

The market had just digested the cues from the US markets, when the Fed made an announcement that it may not go with the targeted Quantitative Easing (QE) and hinted that the economy is showing signs of recovery. This news raised concerns world-wide that the fund flow may gradually reduce in the coming year and therefore world markets tanked on the back of this news. Thereafter, another negative news came in from Europe where Moody's downgraded the domestic and foreign currency government bonds of the United Kingdom (UK). The rating agency downgraded the bonds by one notch to Aa1 from the earlier AAA rating.

According to media reports, this was after the UK economy was facing headwinds in terms of growth. Due to the anticipated slow pace of growth globally, medium-term growth outlook for the UK would continue to remain weak and this may continue at least for the next couple of years. Further, the growth prospects would worsen its fiscal consolidation. At present the UK's debt to GDP level is at around 88.7%, which might go up to 96% of its GDP in 2016. This would worsen the country's financial position. The possible implication of this is that it might further increase the cost of borrowing for the nation.

The rating agency further reported that it doesn't foresee the situation to worsen beyond what has been mentioned in the next 12 to 18 months and hence the probability of change in rating at least for this time period is ruled out. With Moody's downgrading, there could be a chance that the other rating giants like S&P and Fitch might also review UK's economy and come out with their views.

We believe that the rating agencies have been in focus for quite some time now, and the markets ignore them despite this. It can be substantiated with the fact that the UK key equity Index FTSE is currently trading higher by 0.65 per cent to the levels of 6376 levels. Around 18 months ago, the US economy was downgraded by S&P. However, contradictory to their view, the world's largest economy performed well in the past couple of years. The US economy’s borrowing cost has reduced substantially against the expectation that it should have gone up after the downgraded outlook for the nation. The debate on whether to rely on credit rating agencies still remains unanswered.