The condensed Moody's downgrade
What does the rating agency say about Britain?
The Moody's credit rating agency downgraded Britain yesterday. It's important to note that ratings agencies "quite simply don't understand what they themselves are saying", that they aren't very good at rating credit, and that no-one actually cares if a country's rating does get cut — but with all of that in mind, what does Moody's actually say about Britain?
The agency's own summary gives three interrelated reasons for the downgrade:
- 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;
- 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;
- 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.
That is, we aren't growing, that growth is harming our ability to deal with the deficit, and that deficit means we're less likely to be able to deal with any other nastiness the global economic climate throws at us.
Expanding on the first of those, Moody's says:
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 also slams the Chancellor for his "smash and grab raid" on the Bank of England's QE funds, saying that:
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.
The agency is clear, though, that the failure to cut the deficit comes from a lack of growth, not a lack of commitment. In other words, Osborne's plan was always likely to be self-defeating:
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.
And so, Moody's says, with too much debt we won't be able to deal with another recession:
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.
These words will be dissected over the next few days, as every political actor tries to read into them what they want. Some will focus on the fact that Moody's analysis starts with poor growth as the basic factor for Osborne's failure. Others will note that Moody's is still a firm advocate of high-speed deficit reduction.
Still others, myself included, will argue that, apart from the fact that the Chancellor has been hoist by his own petard, all the news really does is prove yet again that ratings agencies aren't very good at their jobs. Moody's recognises that Britain's economic travails stem from depressed growth, but its analysis seems incapable of progressing on from there. Taken as a whole, the agency is saying, with a straight face, that "Britain's attempts to cut its debt have harmed its attempts to cut its debt, and this could harm its attempts to cut its debt", and it sees nothing problematic with that.
Really, nothing in Moody's analysis matters. The only important part of it is that one missing A, and the effect that has on Osborne's credibility.