Published on 14 Feb 2012

Is Moody’s move a vindication for Osborne?

It was always a hostage to fortune. For the best part of a year the chancellor has been making speeches boasting about how Standard & Poor’s removed Britain from negative outlook for its AAA sovereign rating.

During the autumn statement speech just ten weeks ago he even described how Britain was the only major country that had seen its “credit rating improve”.

So by his own measure we are justified to describe Britain’s credit rating as worsened or deteriorating even if it hasn’t been cut. It’s in the relegation zone to be cut. And 30 per cent of the time negative outlook leads to a downgrade.

So how does the chancellor manage the intellectual contortion that coming off negative outlook and then going back on negative outlook are both vindications of his macroeconomic policy?

If you look at Moody’s statement it is true that it mentions a “reduced political commitment to fiscal consolidation, including discretionary loosening ” as one factor that could lead to an actual downgrade. That is a sub clause in a paragraph of reasons, not the main message of Moody’s assessment:

“What could move the the rating down?

“The UK’s AAA rating could potentially be downgraded if Moody’s were to conclude that debt metrics are unlikely to stabilise within the next 3-4 years, with the deficit, the overall debt burden and/or debt-financing costs continuing on a rising trend. This could happen in one of three scenarios, all of which would imply lower economic and/or government financial strength:

(1) a combination of significantly slower economic growth over a multi-year time horizon – perhaps due to persistent private-sector deleveraging and very weak growth in Europe – and reduced political commitment to fiscal consolidation, including discretionary fiscal loosening or a failure to respond to a deteriorating fiscal outlook;

(2) a sharp rise in debt-refinancing costs, possibly associated with an inflation shock or a deterioration in market confidence over a sustained period;

or (3) renewed problems in the banking sector that force a resumption of official support programmes and spill over into the real economy, indirectly causing lower growth and larger budget deficits.

Conversely, the rating outlook could return to stable if the combination of less adverse macroeconomic conditions, progress towards containing the euro area crisis and deficit reduction measures were to ease medium-term uncertainties with regards to the country’s debt trajectory.”

Clearly the chancellor believes that this is a ringing endorsement for his macro policy and aimed at Ed Balls “deficit denialism”. Perhaps there’s a third way. It’s clearly not a licence for a Keynesian fiscal stimulus. But it’s not a ringing endorsement of an economy with more debt, no growth (0.3 per cent since the spending review, less in the SIX QUARTERS of his chancellorship than in the single quarter that preceded it,) and high inflation.

Even within its own framework of cutting the deficit, it has already conceded that the original balance between cutting investment spending and cutting current spending was slightly wrong (and this was changed last November).

Manichean world of Osborne fiscal masochism

No, I think the true lesson of the Moody’s change of view is that the Manichean world of Osborne fiscal masochism versus Balls deficit denialism is nonsense and a particularly unhelpful lens on UK economic prospects right now. For the government it is limiting room for manoeuvre in a state of the world that is entirely different to what it expected at the beginning of its deficit programme.

The British Chambers of Commerce today, post-Moody’s, argued that the verdict was mainly about lack of growth, and that there is room for a £3-5bn fiscal stimulus at the budget.

The real debate might be about whether or not there should be more cuts and tax rises if the economy weakens. Moody’s is pretty clear that one of the main drivers behind its action was that UK national debt will still be rising in 2015. The chancellor won’t be able to pull off his November trick of again stretching out UK austerity into the next parliament, should growth continue to disappoint, and keep the AAA. The fundamental issue: should the AAA be the be all and end all?

The bigger picture here: why on earth are credit ratings elevated to this hallowed status? Moody’s pulled off the spectacular intellectual feat of rating the Bank of England (four centuries of history, ability instantly to create money at will) as a lesser credit than the European Financial Stability Facility (about a year old, political structure subject to funding from Germany etc for € rescue, employs 15 people in Luxembourg).

The answer is that it has been an important piece of marketing for George Osborne, to communicate a tangible benefit from unpopular austerity

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7 reader comments

  1. Philip says:

    I get fed up with these prognostications by these unelected ratings agencies whose pre-2008 performance was so abysmal. The focus on public sector debt to the exclusion of other important matters is a form of ultrasolution & is likely to be self-defeating. It is leading a Gaderene rush into a 1930s style global recesssion with untold damage to our social & economic fabric. Of course, Tories like Osborne don’t care, because it doesn’t affect them & their ilk & they can blame “feral youth” when our social & economic fabric rips apart. They don’t understand cause & effect or that the world isn’t divided up into discrete boxes – their response is soundbites designed to disguise their pursuit of the objectives of maintaining the wealth of the privileged classes.

  2. Andrew Dundas says:

    Truth is that the UK’s sovereign credit rating never was that important. Because almost all UK Bonds are bought by UK funds that can’t take the exchange risk of buying outwith Sterling.

    Nor is (or was) the UK ever remotely like Greece. Our industry had been made competitive by the expedient of a massive 20% devaluation vs. the Euro. Greece is wholly uncompetitive and bankrupt; the UK is neither.

    Bloggers who predicted a fire-storm of inflation can look forward to printing off their words and then eating them. Our inflation was caused by a one-year world commodity boom and that devaluation, not any excessive UK money supply.

    Osborne, Cameron, Cable & Clegg knew nothing about managing the UK economy and – worse than that – have learnt nothing during these last 21 months.

  3. pierregonzalez says:

    I don’t see how situation will improve here !
    More and more people are without job , which means they don’t spend and don’t pay taxes .
    The situation in Europe will not improve so no exports for the UK there and to build new markets far away takes time .
    If you believe that inflation is going down it is because you never go shopping to Tesco !
    I don’t see a single positive indicator to make me believe that England will keep it’s AAA rating which will not be a real financial disaster ( look France ) but a real political one .

  4. Saltaire Sam says:

    Osborne is stuck with the dilemma that he can boast about being able to borrow at low rates because of his austerity measures, but he can only borrow to finance a growing debt because his austerity measures are killing all growth.

    We are keeping interest rates low – good news for business, he claims. Yet businesses can’t borrow even at the low rates partly because the banks aren’t lending and partly because they are frightened of what is around the corner.

    And all because bankers got too clever and spent their time trading in worthless packages between themselves instead of doing what they are supposed to do which is make a profit for those who have money by lending it to those who need it, so they too can make money.

    But then, of course, the bankers would only be paid hundreds of thousands instead of millions. I bet some of them are already wondering what ‘south sea bubble’ they can invent next.

    1. Andrew Dundas says:

      Recall that all sovereign Bond rates are realtive to each other. Then observe that there’s almost no difference between relative yields of German, US & UK Bonds since early 2010 when we had a different government. Our interest rates then were realtively as low as now.

      What’s happened since is that there’s increased risk aversion amongst professional investors – the managers of pension funds and the like. That has made Bonds more attractive than Equities and lowered average sovereign Bond yields as demand for them has risen. Moreover, doubts about Greece and others have made the UK Bonds relatively more attractive.

      In conclusion, UK Bond yields have fallen without any help from UK policy.

  5. Gordon Brown says:

    Here is all you need to know about who the government thinks is important in the UK:

    Prime Minister David Cameron said the UK’s credit rating “matters because the most important thing is to keep interest rates low, to keep mortgage rates low”.

    With FTB age at 37, if you are under 37 the government doesn’t care about you.

  6. pierregonzalez says:

    You always forget to mention the fact that the UK has a good reputation with rating agencies comes from the fact that when the Treasury issues a Bonds auction , 95 % of the subscribers are British .
    And everybody knows that in case of financial troubles the non residents are the first ones to sell .
    In the UK non resident Bond Holders are representing only 5% the agencies consider that the risk of panic is lower.
    This might be true until the moment the panic will start and then everybody will sell at the same time.

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