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Moody's downgrades UK rating from AAA to AA1

Moody's downgrades UK rating from AAA to AA1

February 23rd, 2013 in News

LONDON (AP) - Credit ratings agency Moody's Investors Service downgraded Britain's government bond rating one notch from the top AAA to AA1 Friday, citing weaknesses in the economy's medium-term outlook.

Moody's said "subdued" growth prospects and a "high and rising debt burden" were weighing on the British economy.

The agency said rising debt meant "a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016."

It said, though, that "the U.K.'s creditworthiness remains extremely high," and its outlook was stable.

Moody's said 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 U.K.'s debt trajectory."

For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies - Moody's, Standard & Poor's and Fitch - had placed Britain's rating on negative watch, as the economy continues to struggle.

The British government is in the midst of a program of spending cuts designed to reduce the nation's hefty deficit, but the austerity program has failed to stimulate economic growth.

The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 percent. But the economy contracted by a worse-than-expected 0.3 percent in the last three months of 2012.

Treasury chief George Osborne said in a statement that the downgrade was "a stark reminder of the debt problems facing our country," with a debt accumulated over the years exacerbated by Europe's economic crisis.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said, promising to press on with debt-cutting.

"We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs," Osborne said.