Moody's Downgrades U.K. From AAA To AA1

By Jill Lawless

LONDON -- Credit ratings agency Moody's Investors Service downgraded Britain's government bond rating one notch from the top AAA to AA1 Friday, saying sluggish growth and rising debt were weakening the country's medium-term outlook.

Treasury chief George Osborne said the blow only redoubled his resolve "to deliver our economic recovery plan," based on deep spending cuts.

Moody's said "subdued" growth prospects and a "high and rising debt burden" were weighing on the British economy.

The agency said rising debt meant "a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016."

It said, though, that "the U.K.'s creditworthiness remains extremely high," and its outlook was stable.

Moody's said that "a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the U.K.'s debt trajectory."

For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies -- Moody's, Standard & Poor's and Fitch -- had placed Britain's rating on negative watch, as the economy continues to struggle.

The Conservative-led government is cutting 50 billion pounds ($80 billion) in spending through 2015 in a bid to slash the national debt, which stands at more than 1 trillion pounds, over 70% of GDP.

Moody's said it expected that level to peak at just over 96% of GDP in 2016.

Public sector borrowing remains stubbornly high, and is forecast by the government's Office for Budget Responsibility to be 120 billion pounds for 2013.

Critics say the government's austerity policy has failed to kick-start the economy, which has been through two periods of recession since 2008.

The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9%. But the economy contracted by a worse-than-expected 0.3% in the last three months of 2012.

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