• The immediate implications of the UK’s downgrade of its long term credit rating are fairly benign
  • The resulting weakness of the pound will be hailed by some as a boon to the export sector, certainly it will be a boon to the FTSE’s overseas earnings
  • The more troubling aspect is that it further diminishes the Bank of England’s credibility as a champion of price stability
  • The demand for gilts will remain structural and ratings-agnostic
  • Private sector demand for gilts has been weak due to low yields and improving international economic news
  • More broadly the secular demand for fixed interest assets may be diminishing

So Moody’s became the first institution to cast doubt on the UK’s ability to maintain its debt. Not much doubt admittedly as we shall discuss. There was a certain inevitability about this decision. When asked, as we frequently were, about the chances of a UK downgrade we tended to describe it as 50/50. Clearly the UK’s fiscal position is weak but, relative to the criteria Moody’s use to judge countries, they ought to conclude that default is more or less impossible.
Full article – Market Perspective – Moodys Pounds Sterling (PDF)

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