Moody’s Rating Agency Pleased With UK Austerity Efforts

By: Dr. Mike Campbell

The major ratings agencies are perceived by many governments as wielding too much power. Their job is to act as an “honest broker” (yeah, right…) when assessing the risk associated with a securities issue such that investors understand the safety or otherwise of a given bond issue. The ratings agency gets paid a commission by the issuer of the security whether it be a major corporation or a government raising funds for a major infrastructure project. Negative comments, or the perception of them, from a ratings agency can mean that an issuer has to pay investors higher yields in order to attract them to part with their cash. The agencies came in for much greater scrutiny and calls for regulation in light of the European sovereign debt crisis and the fact that the agencies got it so wrong over the investment grading of sub-prime securities.

Against this background, the UK government will no doubt be delighted to learn that one of the biggest ratings agencies, Moody’s, says that the UK’s triple A status is secure on the back of the austerity measures that the coalition has put in place. "The UK economy appears sufficiently flexible and robust to grow moderately, even in the face of austere fiscal consolidation," a spokesman for the agency noted.

The UK has held the AAA rating since 1978 and Moody’s seems confident that its public finances would remain stable despite sluggish growth and the lasting impact of the global recession. It credited the government’s austerity measures as the reason for its confidence which are designed to stabilise and eventually reverse the deterioration in the country’s financial strength. The British public is not quite as certain as Moody’s as the cuts which underlie the austerity package are proving controversial and may yet spark industrial action.