LONDON/NEW YORK, Feb 23, (Agencies): Britain suffered its first ever sovereign ratings downgrade from a major agency on Friday when Moody’s stripped the country of its coveted top-notch triple-A rating, dealing a major blow to Finance Minister George Osborne.

Moody’s said weak prospects for British economic growth, which have thrown the government’s deficit reduction strategy off course, lay behind its decision to cut the rating by one notch to Aa1 from Aaa.
Austerity has been the watchword for Osborne’s fiscal policy since his Conservative-led coalition came to power in 2010 after an election in which he vowed to defend Britain’s triple-A rating, which can help keep down borrowing costs.

But a very slow recovery from the financial crisis has pushed back by at least two years the government’s goal of largely eliminating the budget deficit by 2015’s election.

The opposition Labour Party blames the deficit on too much austerity.

Nonetheless, Osborne insisted now was not the time to change course. His annual budget due on March 20 is expected to show a further deterioration in the country’s fiscal outlook.

“Tonight we have a stark reminder of the debt problems facing our country and the clearest possible warning to anyone who thinks we can run away from dealing with those problems,” he said in a statement. “Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.”

However, the downgrade may fuel unease amongst members of his own party and his Liberal Democrat coalition partners that Osborne’s gamble that he could slash the deficit and ensure a return to growth by the May 2015 election is failing to pay off.

Sterling fell by almost a cent to around $1.5160 after the downgrade, just off Thursday’s fresh 2-1/2-year low, and analysts expected it to weaken further on Monday, even if many had seen a downgrade coming sooner or later.

“It’s a pretty big deal,” said Kathy Lien, managing director at BK Asset Management in New York. “We didn’t see a huge reaction in the pound because it’s late in the New York session. But you’ll see some more aggressive selling when the markets open (in Asia) on Sunday.”

Moody’s said the outlook on its rating on Britain was now stable, meaning any further change is unlikely for the next year or so.

Britain joins the United States and France in having lost its triple-A rating from at least one major agency, after holding a top-notch rating from Moody’s and Standard & Poor’s since 1978, and from Fitch Ratings since 1994.

Moody’s said that despite considerable economic strengths, Britain’s growth was likely to be sluggish due to a mix of weaker global economic activity - especially in the euro zone - and a drag “from the ongoing domestic public and private-sector de-leveraging process.”

“This period of sluggish growth poses challenges to the government’s fiscal consolidation program, which we now assume will extend well into the next parliament,” Moody’s analyst Sarah Carlson said in a telephone interview with Reuters.

But Ed Balls, the Labour Party’s main spokesman on finance issues, said the Moody’s decision should be a wake-up call for Osborne ahead of his annual budget statement as Chancellor of the Exchequer.
“This credit rating downgrade is a humiliating blow to a Prime Minister and Chancellor who said keeping our AAA rating was the test of their economic and political credibility.”

“The issue is no longer whether this Chancellor can admit his mistakes but whether the Prime Minister can now see that, with UK economic policy so badly downgraded in every sense, things have got to change.”

Howard Archer, chief UK economist at IHS Global Insight, said a new approach from Osborne was improbable.

“The strong likelihood is though that it will not materially lead to a change in his plans.”

Osborne insisted Saturday that he would not abandon his deficit-cutting drive after Moody’s stripped the country of its coveted triple-A debt rating.

The opposition lashed Osborne, saying his plan for the economy was shot through, while analysts said that although it was an embarrassment for him, the downgrade would have a limited impact in the markets.

In an expected rebuff to London’s hopes that sharp spending cuts would both gradually eliminate the deficit and revive growth, Moody’s rating agency cut Britain’s grade by one notch to Aa1 on Friday.

Osborne said it was a “loud and clear message that Britain cannot let up in dealing with its debts, dealing with its problems, cannot let up in making sure that Britain can pay its way in the world.

“What is the message from the ratings agency? Britain’s got a debt problem. I agree with that. I’ve been telling the country for years that we’ve got a debt problem, we’ve got to deal with it.

“What do they also say? That if we abandon our commitment to deal with that debt problem, then our situation would get very much worse and I’m absolutely clear that we must not do that.”

Asked if he had broken his commitment to protecting Britain’s credit rating, he said the true test of credibility was whether Britain could borrow money.

“At the moment we can do that very cheaply with very low interest rates precisely because people have confidence that we have got a plan,” he said.

Moody’s said government debt was still mounting and that growth was too weak to reverse the trend before 2016.

Mark Littlewood, director general of the Institute of Economic Affairs free-market think-tank, said: “The damaging impact of ballooning national debt, public spending raging out of control and tax rises should not be underestimated.

“Taking immediate action to tackle the deficit must now be the priority. George Osborne should focus on making sufficient savings in public spending to implement a substantial programme of tax reductions.”
Meanwhile Howard Wheeldon, senior strategist at stockbrokers BGC Partners, said the downgrade was not a reason for an economic policy change.

“Any amount of manipulation by attempted false stimulation of the economy in an attempt to create ‘artificial’ growth would in my view make an already bad deficit problem even worse,” he said.

“We have all lived beyond our means for far too long.

“If the UK deficit is to be brought down and the task of reducing the debt mountain begun, Mr Osborne has no option but to stick to his guns.

“We are light years away from returning to growth.”