Farewell Eng£AAAnd: Moody's Downgrades The UK From AAA To Aa1

Tyler Durden's picture


And another AAA-club member quietly exits not with a bang but a whimper:


Someone must have clued Moody's on the fact that the UK is about to have its very own Goldman banker, which means consolidated debt/GDP will soon need four digits. In other news, every lawyer in the UK is now celebrating because come Monday Moody's will be sued to smithereens.

Cable not happy as it tests 31 month lows, which however also explains why the Moody's action has another name: accelerated cable devaluation. Those who heeded our call to short Cable when Goldman's Mark Carney was appointed are now 1000 pips richer. Also, please sacrifice a lamb at the altar of Goldman: It's the polite thing to do.


Full report below:

Moody's downgrades UK's government bond rating to Aa1 from Aaa; outlook is now stable
London, 22 February 2013 -- Moody's Investors Service has today downgraded the domestic- and foreign-currency government bond ratings of the United Kingdom by one notch to Aa1 from Aaa. The outlook on the ratings is now stable.
The key interrelated drivers of today's action are:
1. The continuing weakness in the UK's medium-term growth outlook, with a period of sluggish growth which Moody's now expects will extend into the second  half of the decade;
2. The challenges that subdued medium-term growth prospects pose to the government's fiscal consolidation programme, which will now extend well into the next parliament;
3. And, as a consequence of the UK's high and rising debt burden, a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016.
At the same time, Moody's explains that the UK's creditworthiness remains extremely high, rated at Aa1, because of the country's significant credit strengths. These include (i) a highly competitive, well-diversified economy; (ii) a strong track record of fiscal consolidation and a robust institutional structure; and (iii) a favourable debt structure, with supportive domestic demand for government debt, the longest average maturity structure (15 years) among all highly rated sovereigns globally and the resulting reduced interest rate risk on UK debt.
The stable outlook on the UK's Aa1 sovereign rating reflects Moody's expectation that a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the UK's debt trajectory. Moreover, although the UK's economy has considerable risk exposure through trade and financial linkages to a potential escalation in the euro area sovereign debt crisis, its contagion risk is mitigated by the flexibility afforded by the UK's independent monetary policy framework and sterling's global reserve currency status.

In a related rating action, Moody's has today also downgraded the ratings of the Bank of England to Aa1 from Aaa. The issuer's P-1 rating is unaffected by this rating action. The rating outlook for this entity is now also stable.
The main driver underpinning Moody's decision to downgrade the UK's government bond rating to Aa1 is the increasing clarity that, despite considerable structural economic strengths, the UK's economic growth will remain sluggish over the next few years due to the anticipated slow growth of the global economy and the drag on the UK economy from the ongoing domestic public- and private-sector deleveraging process. Moody's says that the country's current economic recovery has already proven to be significantly slower -- and believes that it will likely remain so -- compared with the recovery observed after previous recessions, such as those of the 1970s, early 1980s and early 1990s. Moreover, while the government's recent Funding for Lending Scheme has the potential to support a surge in growth, Moody's believes the risks to the growth outlook remain skewed to the downside.
The sluggish growth environment in turn poses an increasing challenge to the government's fiscal consolidation efforts, which represents the second driver informing Moody's one-notch downgrade of the UK's sovereign rating. When Moody's changed the outlook on the UK's rating to negative in February 2012, the rating agency cited concerns over the increased uncertainty regarding the pace of fiscal consolidation due to materially weaker growth prospects, which contributed to higher than previously expected projections for the deficit, and consequently also an expected  ise in the debt burden. Moody's now expects that the UK's gross general government debt level will peak at just over 96% of GDP in 2016. The rating agency says that it would have expected it to peak at a higher level if the government had not reduced its debt stock by transferring funds from the Asset Purchase Facility -- which will equal to roughly 3.7% of GDP in total -- as announced in November 2012.
More specifically, projected tax revenue increases have been difficult to achieve in the UK due to the challenging economic environment. As a result, the weaker economic outturn has substantially slowed the anticipated pace of deficit and debt-to-GDP reduction, and is likely to continue to do so over the medium term. After it was elected in 2010, the government outlined a fiscal consolidation programme that would run through this parliament's five-year term and place the net public-sector debt-to-GDP ratio on a declining trajectory by the 2015-16 financial year. (Although it was not one of the government's targets, Moody's had expected the UK's gross general government debt -- a key debt metric in the rating agency's analysis -- to start declining in the 2014-15 financial year.) Now, however, the government has announced that fiscal consolidation will extend into the next parliament, which necessarily makes their implementation less certain.
Taken together, the slower-than-expected recovery, the higher debt load and the policy uncertainties combine to form the third driver of today's rating action -- namely, the erosion of the shock-absorption capacity of the UK's balance sheet. Moody's believes that the mounting debt levels in a low-growth environment have impaired the sovereign's ability to contain and quickly reverse the impact of adverse economic or financial shocks. For example, given the pace of deficit and debt reduction that Moody's has observed since 2010, there is a risk that the UK government may not be able to reverse the debt trajectory before the next economic shock or cyclical downturn in the economy.
In summary, although the UK's debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other Aaa-rated issuers.
The stable outlook on the UK's Aa1 sovereign rating partly reflects the strengths that underpin the Aa1 rating itself -- the underlying economic strength and fiscal policy commitment which Moody's expects will ultimately allow the UK government to reverse the debt trajectory. The stable outlook is also an indication of the fact that Moody's does not expect further additional material deterioration in the UK's economic prospects or additional material difficulties in implementing fiscal consolidation. It also reflects the greater capacity of the UK government compared with its euro area peers to absorb shocks resulting from any further escalation in the euro area sovereign debt crisis, given (1) the absence of the contingent liabilities from mutual support mechanisms that euro area members face; (2) the UK's more limited trade dependence on the euro area; and (3) the policy flexibility that the UK derives from having its own national currency, which is a global reserve currency. Lastly, the UK also benefits from a considerably longer-than-average debt-maturity schedule, making the country's debt-servicing costs less vulnerable to swings in interest rates.
As reflected by the stable rating outlook, Moody's does not anticipate any movement in the rating over the next 12-18 months. However, downward pressure on the rating could arise if government policies were unable to stabilise and begin to ease the UK's debt burden during the multi-year fiscal consolidation programme. Moody's could also downgrade the UK's government debt rating further in the event of an additional material deterioration in the country's economic prospects or reduced political commitment to fiscal consolidation.
Conversely, Moody's would consider changing the outlook on the UK's rating to positive, and ultimately upgrading the rating back to Aaa, in the event of much more rapid economic growth and debt-to-GDP reduction than Moody's is currently anticipating.
The UK's foreign- and local-currency bond and deposit ceilings remain unchanged at Aaa. The short-term foreign-currency bond and deposit ceilings remain Prime-1.
Moody's 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 in accordance with EU regulatory requirements. Moody's does not consider that the one-notch downgrade of the UK sovereign has any implications for the standalone strength of UK financial institutions, or for the systemic support uplift factored into certain UK financial institutions' unguaranteed debt ratings.

Moody's previous action on the UK's sovereign rating and the Bank of England was implemented on 13 February 2012, when the rating agency changed the outlook on both Aaa ratings to negative from stable. For the UK sovereign, the actions prior to that were Moody's assignment of a Aaa rating to the UK's government bonds in March 1978 and the assignment of a stable outlook in March 1997. For the Bank of England, the action prior to the one from February 2012 was the assignment of a Aaa rating and stable outlook in March 2010.

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Fri, 02/22/2013 - 17:44 | 3268264 swissaustrian
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... after the US close.

Fri, 02/22/2013 - 17:42 | 3268255 Tsar Pointless
Tsar Pointless's picture

Let's see: If it's a sovereign downgrade, it must be...after markets close, on a Friday.

Why, yes! Yes, indeed, it is so.

This is my "shocked" face.

Fri, 02/22/2013 - 17:43 | 3268258 thismarketisrigged
thismarketisrigged's picture

uk downgraded? ftse should be up 400 pts monday

Fri, 02/22/2013 - 17:43 | 3268260 bonderøven-farm ass
bonderøven-farm ass's picture

Well, atleast their 'beef' dodged the downgrade bullet....nothing to see here.

Sat, 02/23/2013 - 06:31 | 3269535 StychoKiller
StychoKiller's picture

Fast as a horse, hay?

Fri, 02/22/2013 - 17:43 | 3268262 Clayton Bigsby
Clayton Bigsby's picture

Can one monetize fish & chips?

Fri, 02/22/2013 - 18:13 | 3268365 ThirdWorldDude
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Carney will monetize spotted dicks; hard assets and lots of lever(s)-age...

Fri, 02/22/2013 - 18:28 | 3268412 Manthong
Manthong's picture

“Can one monetize fish & chips?”

Yes, but you have to be on guard for debased fishcakes.


Sat, 02/23/2013 - 03:11 | 3269434 Curiously_Crazy
Curiously_Crazy's picture

What about a Toad in the hole?

Fri, 02/22/2013 - 17:43 | 3268263 HaroldWang
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Of course the CNBC BubbleHeads are saying, "This was to be expected, no big deal". All these little "no big deals" happening around the world are going to add up to one big gigantic deal soon. That, my friends, will be really ugly.

Fri, 02/22/2013 - 17:45 | 3268274 fonzannoon
fonzannoon's picture

good thing you are stacking gold eh harold?

Fri, 02/22/2013 - 17:58 | 3268320 poor fella
poor fella's picture

That was fucking CLASSIC! All in the same breath as, "a  .5% hit to US GDP isn't anything in this economy."   Both are Overweight RISK. 

Two jackoffs stroking each other on CNBS - what else is new. Can't wait to hear from M Barto "what's driving these markets", after the break. This should be     e x c e l l e n t.   Watching her brain take a shit on the tele. Would love it if financial news was always LIVE.


Fri, 02/22/2013 - 19:55 | 3268664 max2205
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Uk should be cc- What a joke!

Sat, 02/23/2013 - 11:53 | 3269776 jerry_theking_lawler
jerry_theking_lawler's picture

actually, they are right.....

nothing is a big deal when the Fed is monetizing $85+B per month of debt and they have done away with Mark-to-Market....hell, even I can make money in this market.

Fri, 02/22/2013 - 17:45 | 3268270 debtor of last ...
debtor of last resort's picture

DerivativesDowngradeDay bitchez.

Fri, 02/22/2013 - 17:46 | 3268276 ParkAveFlasher
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And, James Bond got downgraded from Double-0-Seven to Single-0-Seven.  WTF is the world coming to?

Fri, 02/22/2013 - 17:46 | 3268280 Tsar Pointless
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"Outlook is stable".

Stable. You mean kind of stable that houses horses and their accompanying shit?

THAT kind of stable?

Fri, 02/22/2013 - 17:49 | 3268296 fuu
fuu's picture

aka Nestle food processing center.

Fri, 02/22/2013 - 19:23 | 3268559 Shell Game
Shell Game's picture

It's a - Don't Sneeze, You're Holding Nitroglycerin - kind of "stable"...

Fri, 02/22/2013 - 20:32 | 3268773 unrulian
unrulian's picture

long horseburg

Fri, 02/22/2013 - 17:46 | 3268281 magpie
magpie's picture

'tis what happens when you have a yuan swap

Fri, 02/22/2013 - 19:27 | 3268569 Shell Game
Shell Game's picture

It depends on which side of the border Juan is on...

Fri, 02/22/2013 - 17:48 | 3268286 Volaille de Bresse
Volaille de Bresse's picture

No shit? With a genuine GDP/ debt ratio around the 1000% mark?


That's an unexpected news! :-) François Hollande is going bonkers over the news (he hates PM Cameron). 

Fri, 02/22/2013 - 17:49 | 3268298 mudpuppet
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Cleanest dirty shirt here we come!

Fri, 02/22/2013 - 17:53 | 3268304 NRGIsFree
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Historically if figure it will look something like.. AAA, Aa1, bond market collapse. Who could have seen it coming?

Fri, 02/22/2013 - 17:53 | 3268306 slackrabbit
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 Krugman says with 1000% debt / gdp they should be AAA+  ..... with noodles...


Fri, 02/22/2013 - 17:58 | 3268319 Acet
Acet's picture

I was wondering why the value of my stack in the local fiat all of the sudden just took off ...

Now I know!

Fri, 02/22/2013 - 17:58 | 3268322 hugovanderbubble
hugovanderbubble's picture












TURKEY is a mess.


Moodys go home 



Fri, 02/22/2013 - 18:00 | 3268328 yogibear
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Moody's employees travel to the UK at your own risk. 

The US should be somewhere in that bad list.

Moodys, Fitch and S&P know they will be harassed and  taken for a long ride to see Eric the Place-holder if they decide to downgrade the US.


Fri, 02/22/2013 - 20:03 | 3268689 e-recep
e-recep's picture

let the dogs eat eachother. it shouldda be fun to watch.

Fri, 02/22/2013 - 18:02 | 3268330 hugovanderbubble
hugovanderbubble's picture

Moscow 2013g-20, Prelude CurrenciesWar Game...


This gonna end bad...very bad



Fri, 02/22/2013 - 18:04 | 3268337 jmcadg
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I'm surprised Fitch didn't get in there first! The French love us.

Fri, 02/22/2013 - 18:05 | 3268339 yogibear
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" Krugman says with 1000% debt / gdp they should be AAA+"

Krugman has been hitting that Green Scotland Israeli whiskey too much.

Fri, 02/22/2013 - 18:06 | 3268340 azengrcat
azengrcat's picture

AnA1rchy in the UK!

Fri, 02/22/2013 - 18:08 | 3268342 Volaille de Bresse
Volaille de Bresse's picture

I (seriously) wonder what Egan-Jones think of the UK...


"Nobody wants to know except we folks at ZH"? Good answer!

Fri, 02/22/2013 - 18:11 | 3268355 fuu
fuu's picture

Too bad EJ is not allowed to rate sovs.

Fri, 02/22/2013 - 18:38 | 3268357 falak pema
falak pema's picture

Sign of the times : The production of 5 major oil companies has sunk by 25% since 2004 :

La production totale des 5 ‘majors’ du pétrole a chuté d’un quart depuis 2004 | Oil Man

So the global production pie share of oil majors is falling as we head towards peak conventional oil...

Fri, 02/22/2013 - 18:12 | 3268361 Volaille de Bresse
Volaille de Bresse's picture

"I'm surprised Fitch didn't get in there first! The French love us"


Fitch is about as French as a French Croissant sold in a Dallas mall. 

Fri, 02/22/2013 - 18:12 | 3268362 John Law Lives
John Law Lives's picture

"Eurozone to stay in recession for another year"


Sounds like as good a reason as any for the US markets to rally...


Fri, 02/22/2013 - 18:13 | 3268363 Racer
Racer's picture

Thank godman suckers for new all time highs in UK petrol prices, coming to a pump near you very soon

Fri, 02/22/2013 - 18:13 | 3268366 jubber
jubber's picture

but but we only owe £9 Trillion...turn the machines back on

Fri, 02/22/2013 - 18:15 | 3268372 Missiondweller
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But Krugman said we could run huge deficits just like Britain and it was no big deal.


How can this be?

Fri, 02/22/2013 - 18:16 | 3268378 Herdee
Herdee's picture

Ya,old England and the United States are literally bankrupt from war.This last decade has been really big for military spending for both gangs of political crooks in both countries.More medical and various other pensions to pay as well.

Fri, 02/22/2013 - 18:22 | 3268394 TideFighter
TideFighter's picture

I am anticipating WWIII where everyone has already had their weapons taken away and we all fight with

double-barrel shotguns from our fron porch. Ahhhh...Uncle Joe, you're a machine, you are.  

Fri, 02/22/2013 - 18:25 | 3268398 magpie
magpie's picture

Methinks Uncle Joe is a closet Doom player

Sat, 02/23/2013 - 08:08 | 3269601 css1971
css1971's picture

No double barrelled shotguns in the uk. Maybe a couple of sports shooters.

It'll be pointy sticks.

Fri, 02/22/2013 - 18:28 | 3268407 Temporalist
Temporalist's picture

Who needs a calendar anymore when you can just wait for the worst possible news of the week and know it's Friday so the markets can't react.

Fri, 02/22/2013 - 18:37 | 3268429 Sid James
Sid James's picture

We ain't broke. Gasoline costs $8.20 a gallon in Britain. How can we be broke?

Fri, 02/22/2013 - 18:39 | 3268437 Peter Pan
Peter Pan's picture

Plus, when you are going downhill you don't need so much fuel.

Fri, 02/22/2013 - 18:45 | 3268452 Sandmann
Sandmann's picture

Where do you get cheap petrol ? We pay $9.65/gallon or £1.36/litre

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