So, does it matter that the UK has lost its much-prized AAA credit rating?
Some politicians and commentators have forecast another “Black Wednesday”, with a full-blown sterling crisis and rampant, consumer-crushing inflation. But Vince Cable, the Business Secretary, said Moody’s downgrade of the UK to AA1 was “largely symbolic”, while others described it as irrelevant. Both sides insist they will be vindicated by the markets if not today, then soon.
Sterling dropped on Friday night in the wake of Moody’s bombshell to within a whisker of the symbolically crucial level of $1.50. Traders are braced for another drop today and a turbulent session on the equity and bond markets too.
Ostensibly panic is the logical reaction. Britain has been through the Winter of Discontent, the miners strikes, the recessions of the 1980s and 1990s, the implosion of the banks and five years of the eurozone debt crisis to boot yet has never lost its AAA credit rating, until now.
Entering into these uncharted waters, Britain’s economic skipper George Osborne has insisted he will hold his course. But the Chancellor, who faces a grilling this afternoon in front of the Parliamentary Commission on Banking Standards, is under intense pressure to re-think his austerity plans ahead of next month’s Budget.
On Sunday, Tristan Cooper, sovereign debt analyst at Fidelity International, said: “Now that the UK’s triple-A rating has been lost, it probably makes sense for the Chancellor to ease the pace of fiscal consolidation .” Former Chancellor Lord Lawson warned ministers to be careful not to provoke a “run on sterling”. Ken Clarke, another Number 11 alumnus, said it was “going to take several more years... to get back not just our credit rating but to get back to sensible economic growth.”
But a sovereign credit rating downgrade is not the immediate seismic event it once was. Central banks used to close lending lines on downgrade decisions but no longer do. Both America and France have been stripped of their AAA credit ratings with little noticeable impact.
The UK downgrade has been expected for months Moody’s put the UK on negative watch a year ago. The latest move, traders say, was very much priced in.
Osborne can take comfort that Moody’s did not criticise the Treasury’s policies but called for more action on debt. Government borrowing costs may rise in coming months but this will be from a base level that is at historic lows.
The knock-on impact of the downgrade is more complicated. A raft of Government-backed institutions also face credit-rating downgrades in the coming days and weeks, including the banks. Moody’s said it “will assess the implications of this action for the debt obligations of other issuers which benefit from a guarantee from the UK sovereign, and will announce its conclusions shortly.”
After their respective downgrades, America’s state-backed mortgage lenders Fannie Mae and Freddie Mac were re-rated and French banks were also brought down a notch.
But the crucial factor, as so often in markets, is sentiment can Britain and Osborne maintain the confidence of international markets or not? Some argue that Osborne has himself to blame by repeatedly pointing to the AAA rating as proof of the UK’s safe haven status.
A key hurdle will be the second reading of fourth quarter GDP figures on Wednesday. The first reading showed a contraction of 0.3pc and pointed to a triple-dip recession. Osborne will be longing for an improvement to show his policies are the right medicine.
Otherwise, with Fitch and Standard & Poor’s poised to follow Moody’s and downgrade Britain too, the Chancellor may be forced to consider radical action in the Budget. Then we’ll really see if the man is for turning.