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Scandinavia Today / Europe



The shape of thing for the UK after downgrade from AAA to AA1

Monday, 25 February 2013
The fall of UK economy has not affected the market in a big way. In fact, the market had expected that the British credit rating would be downgraded though the question remained when.

What is hitting the UK now is the British pound () which will continue falling as observed since some months ago. Exporters could feel happy about this as British products will remain cheaper abroad but how this will affect the British interest rates in the bond market remain something to be seen in the longer terms.

Investors who only want or can invest in super-safe assets have a market less to choose from and it does, all other things being equal, more such investments would be likely shifting to Sweden, for example,  Swedish government bonds. But the effect should not be exaggerated.

One immediate effect was that the pound weakened further to the Euro, when the markets reopened after the weekend the pound rebounded, however slightly and was trading on Monday morning at just under Skr9.70 to the pound.

Countries with top credit rating
  • Australia
  • Denmark
  • Finland
  • Canada
  • Luxembourg
  • The Netherlands
  • Norway
  • Singapore
  • Sweden
Since the current British economic troubles have been caused partly by the government which came to office with a hawkish attitude towards austerity and what some social commentator described as the government's main aim of attacking the so-call fewer work shy and the constricting of households on modest incomes, little has been done to  ignite the economic growth that is supposed to lead to the huge deficit payment and growth. Falling unemployment is not strong for people are not getting into high paying jobs, government still pay lots of tax credit to keep worker motivated.

Still Britain is determined to stick to its plan to reduce the budget deficit, Prime Minister David Cameron's spokesman said on Monday when asked about Moody's downgrade of the country's sovereign credit rating, reports Reuters .

"The plan is working, that's why the economy is healing," the spokesman said. "What the government is absolutely determined to do is to stick to the path."

The spokesman said Moody's downgrade of Britain's rating to Aa1 from AAA was a clear message which showed Britain had to deal with its debts.
According to Sky news, senior Conservatives have rallied round Chancellor George Osborne in the wake of the decision by agency Moody's, predicting it will have little impact on the Government's borrowing costs.

The party backbenchers also upped calls for tax and spending cuts to kick-start growth, warning that next month's Budget is the "last chance saloon".
Meanwhile, Labour reiterated its calls for borrowing to be increased in the short term to fund a fiscal stimulus.

The downgrade of the UK's credit rating should be a benefit for Sweden but it likely will not be that way. Sweden stand out as one of the nine remaining countries in the world with the highest credit rating from both Moody's and Standard & Poor's.  When the United States and France had their ratings lowered not much was noticed. The lesson is rather that a country with a large and liquid market is not as dependent on the credit rating's double or triple-A. This is especially true if the country, like the U.S. and UK, that has its own currency, thus using the money printing approach it can handle most of those shocks that hit countries that rely on others for liquidity.

The bad side for the UK is however, that Moody's expects that UK growth will be weak decade out. From Moody's perspective, it is ominous because it makes it harder to reduce the deficit and debt, making the country vulnerable to external shocks.
Weak growth means that Swedish goods and services  would find it hard to sell in the UK. A weaker pound also makes that those resources are worth less. The one main consolation is that Swedish travellers to London would find lower prices on everything from shopping and theatre to beer and football.
by Team

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