Moody’s shifts outlook for UK and France
Moody’s put the UK, France and Austria on negative outlook late on Monday night, raising the prospect that the three countries would lose their triple A ratings due to exposure to the eurozone debt crisis.
It is the first time that the heavily indebted UK has been placed on negative credit outlook by a big rating agency since the eurozone crisis erupted.
George Osborne, the UK chancellor, said the move supported the government’s tough austerity measures and was “a reality check for anyone who thinks Britain can duck confronting its debts”.
But Ed Balls, Labour’s shadow chancellor, described the decision as a “significant warning to a chancellor who himself made balancing the books by 2015 and the views of the credit rating agencies the key benchmarks for the success of his economic policy”.
He added: “We have consistently argued that the chancellor’s gamble – raising taxes and cutting spending too far and too fast – would backfire because without a balanced plan that promotes jobs and economic growth the government will not succeed in getting the deficit down.”
A negative outlook means that Moody’s could downgrade the UK in the next 12 to 18 months. The country now shares the same outlook from the rating agency as the US and France.
Yves Lemay, managing director for European sovereigns at Moody’s, said: “The signal is there is pressure on the rating, but we do recognise that the UK’s triple A has some resiliency.”
French finance minister François Baroin said France’s triple A rating was maintained by Moody’s because of factors including “the size of its economy” and its “increased productivity”. He added that the French government was “determined to press ahead with its actions to boost growth and competitiveness”.
Moody’s said in a statement: “The primary driver underlying Moody’s decision to change the outlook on the UK’s [triple A] rating to negative is the weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years.”
It added that the UK was vulnerable to the eurozone and that its outstanding debt placed it among the most heavily indebted of its triple A-rated peers.
“Although the UK is outside the euro area, the high risk of further shocks, economic, financial, or political within the currency union are exerting negative pressure on the UK’s [triple A] rating given the country’s trade and financial links with the euro area.”
The euro and pound both dropped about 0.3 per cent against the dollar in thin early trading in Asia.
“Moody’s tends to be more conservative than S&P but it’s trailblazing here by placing the UK on a negative [outlook],” said Kathy Lien, director for currency research at GFT Forex.
Moody’s also downgraded a number of eurozone countries including Italy, Spain and Portugal.
Italy was cut to A2 from A3, Portugal cut to Ba3 from Ba2, Spain downgraded to A3 from A1. Slovakia, Slovenia and Malta also had their ratings cut with negative outlooks.
The move by Moody’s comes after Standard & Poor’s downgraded France and Austria, one notch to double A, last month.
Moody’s two notch downgrade of Spain places it rating one notch below that of S&P.
Mr Lemay of Moody’s said the tough economic outlook facing the eurozone was particularly acute for Spain, with an unemployment rate above 20 per cent and a banking system that is still very much challenged.
EU names unstable economies
France and the UK were named among 12 non-bailout countries whose economies are suffering from so many imbalances that they will be subject to in-depth investigation by the European Union, writes Peter Spiegel.
The 12 countries to be named in a report on Tuesday by the European Commission, the EU’s executive branch, have triggered concerns because they have run afoul of a newly created EU “scoreboard” that measures economic danger signs like asset bubbles, high labour costs and persistent trade deficits.
According to a draft of the 20-page report, obtained by the Financial Times, the list includes countries viewed as among the most troubled non-bail-out economies in the eurozone: Spain, Italy, Belgium and Cyprus.
But the inclusion of other countries largely viewed as outside the danger zone – eurozone member states France, Finland and Slovakia as well as non-euro members UK, Denmark and Sweden – illustrates economic instability could persist in Europe even as the bloc attempts to address the near-term debt crisis. Hungary, which is in talks on financial assistance, is included, as is Bulgaria.
The report was prepared as part of a new “macroeconomic imbalances” evaluation that, like the commission’s tough new debt and deficit rules, could lead a country to face sanctions if it does not abide by Brussels’ recommendations.
“Large and persistent macroeconomic imbalances … accumulated over the past decade were part of the root causes of the current economic crisis,” the report finds.
But a senior EU official involved in the report cautioned that the commission is unlikely to move quickly to introduce sanctions – which in the eurozone could include fines – and instead said it will be used as a way to launch “enhanced surveillance” to assist countries before problems become acute.
“I would indeed underline that partnership, rather than sanctions, is the raison d’être of the imbalances exercise,” said the official. “For instance, with Italy and Spain we can best work on the basis of this analysis as we provide policy advice to them.”
Still, a six-page country-by-country analysis included in the report contains a tough evaluation of several countries previously regarded as relatively healthy economically.
Both France and the UK are warned that their decline in share of world exports are among the highest in the EU, although the UK is given credit for seeing that fall-off stabilise in recent years. France, on the other hand, is warned of the impact on French business.
“The reduction in profitability of French companies and the implications for investments are relevant factors that deserve further analysis,” the report says.
In addition to the UK’s reduced export share – which dropped 24.3 per cent over five years, according to the report, the highest fall-off in the EU – Britain was also cited because of concerns over its private debt levels, which remain high even though housing prices may have further to fall.
“The high level of private debt is a concern also in a context of a weak public finance situation with high and increasing public debt levels,” the report finds. “While both the level of household debt and real house prices has been reduced, they still remain high which suggests that the unwinding of these imbalances has further to go.”
By Michael Mackenzie and Vivianne Rodrigues in New York and George Parker in London
It is the first time that the heavily indebted UK has been placed on negative credit outlook by a big rating agency since the eurozone crisis erupted.
George Osborne, the UK chancellor, said the move supported the government’s tough austerity measures and was “a reality check for anyone who thinks Britain can duck confronting its debts”.
But Ed Balls, Labour’s shadow chancellor, described the decision as a “significant warning to a chancellor who himself made balancing the books by 2015 and the views of the credit rating agencies the key benchmarks for the success of his economic policy”.
He added: “We have consistently argued that the chancellor’s gamble – raising taxes and cutting spending too far and too fast – would backfire because without a balanced plan that promotes jobs and economic growth the government will not succeed in getting the deficit down.”
A negative outlook means that Moody’s could downgrade the UK in the next 12 to 18 months. The country now shares the same outlook from the rating agency as the US and France.
Yves Lemay, managing director for European sovereigns at Moody’s, said: “The signal is there is pressure on the rating, but we do recognise that the UK’s triple A has some resiliency.”
French finance minister François Baroin said France’s triple A rating was maintained by Moody’s because of factors including “the size of its economy” and its “increased productivity”. He added that the French government was “determined to press ahead with its actions to boost growth and competitiveness”.
Moody’s said in a statement: “The primary driver underlying Moody’s decision to change the outlook on the UK’s [triple A] rating to negative is the weaker macroeconomic environment, which will challenge the government’s efforts to place its debt burden on a downward trajectory over the coming years.”
It added that the UK was vulnerable to the eurozone and that its outstanding debt placed it among the most heavily indebted of its triple A-rated peers.
“Although the UK is outside the euro area, the high risk of further shocks, economic, financial, or political within the currency union are exerting negative pressure on the UK’s [triple A] rating given the country’s trade and financial links with the euro area.”
The euro and pound both dropped about 0.3 per cent against the dollar in thin early trading in Asia.
“Moody’s tends to be more conservative than S&P but it’s trailblazing here by placing the UK on a negative [outlook],” said Kathy Lien, director for currency research at GFT Forex.
Moody’s also downgraded a number of eurozone countries including Italy, Spain and Portugal.
Italy was cut to A2 from A3, Portugal cut to Ba3 from Ba2, Spain downgraded to A3 from A1. Slovakia, Slovenia and Malta also had their ratings cut with negative outlooks.
The move by Moody’s comes after Standard & Poor’s downgraded France and Austria, one notch to double A, last month.
Moody’s two notch downgrade of Spain places it rating one notch below that of S&P.
Mr Lemay of Moody’s said the tough economic outlook facing the eurozone was particularly acute for Spain, with an unemployment rate above 20 per cent and a banking system that is still very much challenged.
EU names unstable economies
France and the UK were named among 12 non-bailout countries whose economies are suffering from so many imbalances that they will be subject to in-depth investigation by the European Union, writes Peter Spiegel.
The 12 countries to be named in a report on Tuesday by the European Commission, the EU’s executive branch, have triggered concerns because they have run afoul of a newly created EU “scoreboard” that measures economic danger signs like asset bubbles, high labour costs and persistent trade deficits.
According to a draft of the 20-page report, obtained by the Financial Times, the list includes countries viewed as among the most troubled non-bail-out economies in the eurozone: Spain, Italy, Belgium and Cyprus.
But the inclusion of other countries largely viewed as outside the danger zone – eurozone member states France, Finland and Slovakia as well as non-euro members UK, Denmark and Sweden – illustrates economic instability could persist in Europe even as the bloc attempts to address the near-term debt crisis. Hungary, which is in talks on financial assistance, is included, as is Bulgaria.
The report was prepared as part of a new “macroeconomic imbalances” evaluation that, like the commission’s tough new debt and deficit rules, could lead a country to face sanctions if it does not abide by Brussels’ recommendations.
“Large and persistent macroeconomic imbalances … accumulated over the past decade were part of the root causes of the current economic crisis,” the report finds.
But a senior EU official involved in the report cautioned that the commission is unlikely to move quickly to introduce sanctions – which in the eurozone could include fines – and instead said it will be used as a way to launch “enhanced surveillance” to assist countries before problems become acute.
“I would indeed underline that partnership, rather than sanctions, is the raison d’être of the imbalances exercise,” said the official. “For instance, with Italy and Spain we can best work on the basis of this analysis as we provide policy advice to them.”
Still, a six-page country-by-country analysis included in the report contains a tough evaluation of several countries previously regarded as relatively healthy economically.
Both France and the UK are warned that their decline in share of world exports are among the highest in the EU, although the UK is given credit for seeing that fall-off stabilise in recent years. France, on the other hand, is warned of the impact on French business.
“The reduction in profitability of French companies and the implications for investments are relevant factors that deserve further analysis,” the report says.
In addition to the UK’s reduced export share – which dropped 24.3 per cent over five years, according to the report, the highest fall-off in the EU – Britain was also cited because of concerns over its private debt levels, which remain high even though housing prices may have further to fall.
“The high level of private debt is a concern also in a context of a weak public finance situation with high and increasing public debt levels,” the report finds. “While both the level of household debt and real house prices has been reduced, they still remain high which suggests that the unwinding of these imbalances has further to go.”
By Michael Mackenzie and Vivianne Rodrigues in New York and George Parker in London
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