02.28.2013
By Terry Flanagan

U.K. Brushes Off Triple-A Downgrade

The City of London has, seemingly, taken the loss of its prestigious triple-A credit rating from ratings agency Moody’s very much in its stride.

When the U.S. lost its own top-notch triple-A debt rating in August 2011 from fellow ratings agency Standard & Poor’s, U.S. debt markets were generally unaffected.

Canada and Germany are now the only two countries in the world left with triple-A status from all three major ratings firms, the other being Fitch, which has said that it is holding off on making a decision on the U.K.’s triple-A status until after the budget announcement on March 20.

“The announcement has actually been relatively muted in terms of its impact on U.K. government bonds,” said Nigel Sillis, director of research, fixed income and currency at Baring Asset Management, an investment manager.

“This is because, by and large, the market had expected the downgrade and also because the ‘safe-haven’ features of gilts have become less relevant in light of an improving eurozone debt profile.”

France, too, lost its triple-A status from S&P in January last year and more recently saw Moody’s downgrade its status to Aa1 in November, but both France and the U.S. saw a pick-up rather a sell-off in the government bond market following the announcements.

“It is important to put the [U.K.] announcement from Moody’s in perspective,” said Andrew Sutherland, head of credit at Standard Life Investments, an asset manager, in an investor note. “The rating move was just one notch and the outlook remains stable. France (Aa1 Moody’s, AA+ S&P) and the U.S. (AA+ S&P) remain on negative outlook. So stable is good.”

The downgrade appears to be being felt more in political circles rather than in the market itself after the now Chancellor of the Exchequer George Osborne had made a big play about the significance of holding on to the U.K.’s triple-A rating just before the last general election, from which his Conservative party emerged victorious.

“While the ratings downgrade may attract all the wrong headlines, the reality is that other countries have been through this before and have not found the impact to be as bitter as expected,” said Dermot Campbell, managing partner of Kuber Ventures, a U.K.-based one-stop shop for enterprise investment scheme investing.

And some can even see the benefits it may bring.

“For months the only question had been when, not if, the downgrade happened,” said Glenn Uniacke, head of options at forex specialists Moneycorp. “It had been so heavily priced in that now it finally has, it may serve as a ‘reversal indicator’—perversely easing the pressure on the pound as the uncertainty ends.”
Sterling was initially impacted by the downgrade, touching a two-year low of $1.5073 during early trading on February 25 following the announcement the Friday before, although the pound has gained slightly in value since.

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