UK credit rating viewed as safe

16th March 2010

The credit ratings of major AAA governments, including the US and the UK, are well positioned, says Moody's Investors Services.

Moody's released a report on the financial position of major AAA rated governments.

This includes the four largest - Germany, France, the UK and the US - as well as smaller ones, including Spain.

The report will reassure the bond markets about the ability of the US and the UK to make future debt payments.

A key finding is that the AAA ratings of the UK and the US are secure because of the capability of their respective governments to reverse recent deficits.

These two governments face the biggest interest repayments relative to the size of their incomes, compared with other economic giants.

The report says that these governments will be able to repair their balance sheets in the wake of the credit crisis.

"In light of the muted recovery, discretionary fiscal adjustment [spending cuts and tax rises] is now the principal means of repairing the damage that the global crisis has inflicted on government balance sheets," says Pierre Cailleteau, managing director, Moody's Sovereign Risk Group.

Governments face a "delicate balancing act", the report said, in relation to the timing of these fiscal adjustments. Cutting government spending could jeopardise economic recovery and damage governments' power to tax.

However, postponing spending cuts for too long is also a risk, effectively "testing the patience of the market". This could lead to rising interest rates, reducing the ability of governments to raise debt in the future.

The UK Conservative Party's Philip Hammond, shadow chief secretary to the Treasury, believes the current Labour government would be unable to walk this tightrope.

"The ability of the government to maintain its AAA rating hinges on the credibility of its deficit reduction plans. Gordon Brown has failed that test," he said in a statement.

Source: BBC