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U.K. Adds a Credit Rating Cut by Moody’s to Its List of Woes

The U.K., beset by growing coronavirus concerns and struggling to bridge the gap with the European Union over a post-Brexit trade deal, has had its credit rating cut by Moody’s Investors Service.

The credit assessor cited softer economic growth, an erosion of fiscal strength and a weakening in institutions and governance as it lowered the nation’s grade by one notch to Aa3, its fourth highest ranking.

The coronavirus pandemic has blown a hole in the public finances, with the government spending tens of billions to support jobs and prop up an economy which has already suffered its biggest-ever quarterly contraction. The pandemic has pushed the national debt above 2 trillion pounds ($2.6 trillion), or more than 100% of gross domestic product.

“Even before the coronavirus-induced shock, a combination of persistently low productivity growth since the global financial crisis, tepid business investment since the June 2016 EU referendum, and prolonged uncertainty over the eventual future trading relationship with the EU were weighing on the UK’s growth performance,” Moody’s said.

Moody’s, which has had a negative outlook on the U.K. since November, said the outlook on the new rating is stable.

The pound, which has swung between gains and losses through much of Friday, budged only slightly after the Moody’s announcement, ending the day little changed at $1.2915.

Chancellor of the Exchequer Rishi Sunak has spoken of a “sacred responsibility” to repair battered public finances, yet many economists and the International Monetary Fund are warning against a premature withdrawal of fiscal support at a time when much of the country is facing a fresh wave of restrictions to stem the virus. The material increase in debt poses risks to debt affordability in future years, Moody’s said.

The economy faces further stress as it nears the end of its transition out of the European Union. Prime Minister Boris Johnson said Friday that the U.K. will now get ready to leave the single market and customs union without a new free-trade deal in place, blaming the bloc for refusing to offer good enough terms. He said he would always be willing to hear from the EU if the bloc’s leaders came back to the U.K. with “a fundamental change of approach.”

“Negative long-term structural dynamics have been exacerbated by the decision to leave the EU and by the UK’s subsequent inability to reach a trade deal with the EU that meaningfully replicates the benefits of EU membership,” Moody’s said.

Near-term, a no-deal Brexit could deliver a shock equivalent to about 1.5% of gross domestic product and leave the U.K. economy’s annual potential growth rate 0.2 percentage points lower in the future, according to Bloomberg Economics’ Dan Hanson.

The pandemic “has brought new and considerable pressures on the UK economy” and Moody’s sees “a sharper peak-to-trough contraction for the UK than for any other G-20 economy,” the company said. “Moody’s forecasts also reflect the view that lingering Brexit uncertainty will hold back the recovery in the second half of the year.”

Fitch Ratings downgraded the U.K. to AA- in March, citing the weakening of public finances caused by the impact of the Covid-19 outbreak. It’s currently rated AA, the third-highest investment grade, at S&P Global Ratings.

— With assistance by Andrew Atkinson

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