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Markets shrug off Britain’s downgrade

25 February 2013

It seems that Moody’s downgrade of UK government bonds on Friday night has — so far — had more effect on the headlines than the markets.

After the news on Friday night, the pound fell by about a cent against the dollar, from $1.525 to $1.515. And against the euro it fell from €1.157 to €1.147 (it’s fallen a little further this morning, to €1.144). But that’s no bigger than the drop on Wednesday on the news that Mervyn King and two other members of the Bank of England’s Monetary Policy Committee had voted in favour of more quantitative easing.

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And it doesn’t seem to have raised the cost of borrowing much. The yield on ten-year government bonds did rise slightly from 2.11 per cent at close on Friday to 2.17 per cent this morning, though it’s since fallen back to 2.13 per cent now.

Meanwhile, the stock market has risen: the FTSE 100 is up 42 points since close on Friday, from 6339 to 6381.

The reason for the muted impact is not that investors don’t care about the UK’s ability to pay back its debts, but rather that the credit rating doesn’t give them any extra information. As Fidelity Worldwide Investment’s Andrew Wells put it this morning ‘The UK’s downgrade from triple-A is very much priced-in and anticipated by professional investors.’ ETX Capital’s Ishaq Siddiqi backs him up: ‘Traders are likely to shrug off the downgrade as it has been priced-in for some time and more importantly, does not fundamentally change the UK’s overall investment value.’ And Kit Juckes of Socite Generale says ‘The risk of a UK default is no higher today than it was a week ago’.

But that’s not to say the downgrade might not have a big economic impact, through its political impact — as Citi’s Michael Saunders warned in December:

‘Many investors currently seem to assume that the loss of the UK’s AAA rating would not, by itself, be a major problem for markets. However, a ratings downgrade would be a major blow for the government and hence, by adding to risks that the coalition parties do badly in the 2015 election, it would increase uncertainty over the implementation of fiscal austerity in the runup to the 2015 election and beyond it — and such uncertainties probably would be bad for sterling assets in our view.’

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  • Kingbingo

    Its because markets lead and rating agencies follow, NOT the other way around.

    You can’t seriously believe that institutional managers are going to wait 3 years for Moodys before making up their mind about the credit worthiness of Britain. Rating agencies only exist to shepard the dumb money and the headlines, the smart money charts its own course.

  • Daniel Maris

    Not that surprising I think. The issue rather is whether we are on a slippery slope.

    A lot depends on growth.

    What people don’t factor in is the per capita costs of past and current mass immigration to the UK and how that is holding back per capita growth and adding a lot of pressure to the health and welfare system (requiring further taxation or borrowing).

    • the viceroy’s gin

      …so it’s like windmills then, eh?

  • Jebediah

    Economic success is easy to see:
    The more capitalist you are: China, other Asia, India, Russia, USA
    The least debt you have: China, Canada, Australia, Germany.

    Economic failure is easy to see:
    The least capitalist you are: EU, France.
    The more debt you have: UK, Greece, Japan.

    If you are a least capitalist state and have high debt you’re really screwed
    So the answer is deregulation, shrinking the state and reducing debt. Fortunately shrinking the state does reduce the debt. But we’ve seen none of that in the UK.

    • Koakona

      here here

    • Tom Tom

      Don’t take too close a look at China’s credit bubble or its very dodgy loans book to favoured enterprises in unprofitable sectors such as solar………….……………

    • Daniel Maris

      How are you defining success? Surely only per capita makes sense. France is hugely more successful than China on that basis.

      Japan has the biggest debt in the world but still outperforms countries like Australia. Its per capita GDP is about a third higher than Australia’s.

      Also the USA has huge debt but you count it as a success.

      Countries like Canada, Australia and Russia who sit on huge natural resources don’t to my mind summon up economic “success”. They are not really much more successful than Saudi Arabia – who have huge wealth but have done very little to earn it.

      And then there are wider questions. Where would you rather live – China or France?

      I think on most measures I would say the USA is probably the most successful economy on the planet because it is still the van of technological development and commercial practices. But it is saddled with huge debt.

  • Thatcherite Lee

    Yet again the Telegraph are telling porkies. Anyone reading their headline right now would think there’s been some massive slump in the pound but there hasn’t been. Since that article was first written at 6AM this morning the pound has risen in value to pretty much its previous level at the end of last week yet they still have the same misleading headline. I seriously think they are trying to talk the pound down.

  • taytelbaum

    Naughty child. You should correct him, mr Torrence (The Shining)

  • Tom Tom

    Moody’s Rating doesn’t matter much for financial markets because they already have the information on which Moody’s bases its assessment. It matters politically because that was the message of Osborne – that he could save Britain from turning into Greece. He thought he would do a Goeffrey Howe but lacked North Sea Oil and so the foreign wars and squeeze on households is all we get…..for the indefinite future. There is very little Osborne can do now, Expectations have been formed and they are that this Depression has many many years to run. The limited tickover he inherited may have burned out, but Osborne stamped it out and has nothing to re-kindle

    • Makroon

      That was no “tickover”, it was a classic dead cat bounce.

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