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Pound 'At Risk' After AAA Credit Rating Blow

(c) Sky News 2013

Global financial markets are to deliver their first response to the decision of a major credit agency to strip the UK of its prized AAA credit rating today.

Senior Conservatives have rallied round Chancellor George Osborne in the wake of the decision by agency Moody's, predicting it will have little impact on the Government's borrowing costs.

But there are fears that sterling will be hit hard after it fell sharply against the dollar overnight in Asia.

Tory backbenchers also upped calls for tax and spending cuts to kick-start growth, warning that next month's Budget is the "last chance saloon".

Meanwhile, Labour reiterated its calls for borrowing to be increased in the short term to fund a fiscal stimulus.

Explaining its move on Friday, Moody's pointed to "subdued" growth prospects in the UK and a "high and rising debt burden".

It now expects the "period of sluggish growth" to "extend into the second half of the decade".

Business Secretary Vince Cable dismissed the downgrade as "largely symbolic".

The Liberal Democrat told the BBC's Andrew Marr Show: "In terms of the real economy there is no reason why the downgrade should have any impact.

"If you remember last year the US was downgraded, the economy grew strongly relative to Europe... and France had a downgrade last year, its interest rates that it borrows long term in the markets are only a little above ours.

"These things do not necessarily affect the real economy but they reflect the fact that we are going through a very difficult time and we are trying to balance the need to get the deficit and the budget under control with the need to get back to economic growth."

Tory former chancellor Ken Clarke warned it would take years to regain the top credit rating and return to "sensible economic growth".

But he said the coalition should "stick to" its policy, adding: "I think the way in which we will recover confidence is making clear we're a strong firm Government, that the strategy we're on is the one that is eventually going to get things better and that the alternatives frankly are a bit odd."

Former Conservative chancellor, Lord Lawson, insisted the "basic thrust" of the Government's policy was right, but he also warned that ministers and the Bank of England had to be careful not to trigger a run on the pound.

The peer told Sky News' Dermot Murnaghan programme: "I hope there won't be a run on sterling.

"I think it would be a very great mistake if anyone in the Government or Bank of England gave the impression we would like to see a further depreciation of sterling. That would not be clever, that would not be sensible, that would not be helpful."

Former Labour chancellor Alistair Darling said he had been "extremely doubtful" of the Government's strategy ever since 2010.

He told the Murnaghan programme: "I think that when they were elected they very unwisely staked their reputation on maintaining the AAA credit rating that they had, they compared us to Greece, they said they could eradicate the structural deficit by 2015.

"These were wildly optimistic claims and they were perhaps made because of inexperience and maybe a touch of recklessness.

"But the result is that they have sustained quite substantial political damage, but more importantly for the country the economic harm of yet another another blow to confidence. I think that is very, very important, they have been following the wrong economic strategy, but they are paying a very, very heavy price for it."

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