The pound has weakened against the Euro and dollar today as a result of the loss of its once coveted AAA status.
However to put this into context we must remember that the other two main credit rating agencies Standard & Poor and Fitch still both have Britain on a AAA rating.
So it would seem that Britain’s credit rating is more tarnished than wrecked at the present.
But although Moody’s downgraded Britain from AAA to AA1 it did say that the country had ‘significant credit strengths and that it saw the rating as now stable because it expects ‘….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 UK's debt trajectory’.
We would therefore assume that the main danger to a further downgrade would be from George Osborne giving up his ‘Plan A’ of austerity and cuts, which have so far actually increased the overall debt.
Labour has called this a disaster for the Chancellor (what else would they say) whereas the Business Secretary Vince Cable has called it ‘largely symbolic’.
But the Tory Grandee, ex-chancellor and now minister without portfolio, Ken Clarke has said that it will take years for Britain to regain its full AAA status. This is something that will resonate with many bloggers and forum activists who, many years ago, said that the UK was headed for at least a decade in the wilderness of stagflation a la Japan. Remember that we’ve already had five years of it.
Many would argue that a downgrade now just reflects the true position that Britain is in after all those years at the credit trough and that most of the costs and risks have already been factored in so not much will really change after the initial surprise has worn off. After all look at what happened (or didn’t happen) to the USA after its AAA credit rating was lost.
And as Dermot Campbell, Managing Partner of Kuber Ventures, says the downgrade does not have to mean a downturn for everyone.
“While the ratings downgrade may attract all the wrong headlines, the reality is that other countries have been through this before and have not found the impact to be as bitter as expected. Indeed, there is an argument to suggest that this could be seen as a golden opportunity for re-invigorating the UK economy.”
“Currency depreciation will have a positive impact on the British export market as other countries come to the UK to ‘buy cheap’. This in turn will stimulate stronger growth in UK small businesses and encourage the economy to heal from within, leading to a quicker climb out of the economic quagmire.
“The key to success will be to ensure small businesses still receive the cash injection they need to grow and capitalise on a better export market. However, with bank interest rates likely to rise and lending on the wane, encouraging investment in small businesses by other means will become crucial.
“Investors looking to take advantage of an upturn in the UK small business market should target EIS investments. As well as being tax efficient, EIS has the ability to help the UK economy to pull itself up by its boot laces.”