Professor Gary Cook is Head of Economics, Finance and Accounting at the University of Liverpool’s Management School
“There has been much comment, speculation and, in some quarters, concern about the decision of Moody’s, the credit rating agency, to downgrade the UK’s credit rating from the top AAA rating to AA1 for the first time in over 30 years.
“How worried should we be? As far as the downgrade itself is concerned, not very from an economic point of view. The UK has been on ‘negative’ watch for some months with all three major credit rating agencies (the other two being Fitch and Standard & Poors).
“The downgrade moves the UK from being ‘extremely strong’ to ‘very strong’ in its ability to meet its financial obligation, in other words UK government debt is still very secure and investors the world over remain very willing to hold this debt.
“The UK would have to slip another four rungs down the rating ladder to lose its important ‘investment grade’ status, below which concerns about security start to register, albeit slightly at first. To put the matter in perspective, the UK now has the same credit rating with Moody’s as Hong Kong, and well above Greece, about whom there has been well-publicised concerns in recent years.
“The economic significance of the downgrading is that it is really a symptom of the sluggish recovery from the financial crisis, which has been very evident anyway to the general public and the financial markets alike. In essence it tells us what we already knew.
“Not too much should be made of the decline in sterling as markets opened on Monday (25 February), sterling has been depreciating anyway as evidence of weak recovery has mounted.
“The downgrade is much more significant from a political perspective, not least because the Chancellor has staked so much on defending the AAA rating.
“The state of the public finances when the coalition came to power was very serious and the need to establish a credible plan to bring the finances under control was real and immediate. Commenting on the Comprehensive Spending Review and the Emergency Budget, which set out the government’s plans to eliminate the annual budget deficit and the size of the national debt relative to income, the author stated over two years ago that he hoped the Chancellor would either be lucky, or pragmatic.
“He has not been lucky, here’s hoping he is pragmatic and does not over-react to the downgrade by introducing yet more austerity in a year of fragile economic recovery. That prospect apart, the general public should not worry unduly, nor lose sleep over the downgrade.”