WASHINGTON/LONDON:Credit ratings agency Moody's on Friday downgraded the outlook for Britain'sdebt, citing mounting policy challenges amid the Brexit debate. The agency cutthe outlook to negative from stable but kept the debt at the investment gradeAa2. The ratings agency Fitch had similarly put Britain on "negativewatch" in February. Pointing to "paralysis that has characterized theBrexit-era policymaking process," Moody's said London has "struggledto cope with the magnitude of policy challenges that they currently face."
In addition,Britain's "economic and fiscal strength are likely to be weaker goingforward and more susceptible to shocks than previously assumed," Moody'ssaid in a statement. Britons voted by 52 percent to leave the European Union ina 2016 referendum, but MPs have been divided over how, when and even if thatresult should be delivered. The political wrangling has forced two successiveConservative governments to ask the European Union to delay Brexit three timesthis year.
It is now set forJanuary 31. Current Tory Prime Minister Boris Johnson hopes the snap electionnext month will give him a majority in the House of Commons to allow him toratify his exit terms and finally leave the EU. "Over the longer term,institutional weakening may also impact the UK's economic strength, through itseffect on the investment climate and on the UK's attractiveness to skilled andunskilled foreign labor," Moody's said.
"In recentyears, we have already seen the negative impact this can have, and Moody'sexpects this negative influence will likely endure as the exit processcontinues and uncertainties persist during the subsequent phase of tradenegotiations with the EU and with other nations."
Britain remainshighly indebted and this was unlikely to change in the next three to fouryears, according to Moody's. In a toughly worded statement, Moody's said thefissures in Britain's society and politics exposed by its still-unresolveddecision to leave the European Union would be long-lasting. "It would beoptimistic to assume that the previously cohesive, predictable approach tolegislation and policymaking in the UK will return once Brexit is no longer acontentious issue, however that is achieved," the ratings agency said.
Moody's saidBritain's 1.8 trillion pounds ($2.30 trillion) of public debt - more than 80percent of annual economic output - risked rising again and the economy couldbe "more susceptible to shocks than previously assumed." Both of themain political parties have promised big spending increases ahead of nextmonth's election.
"In thecurrent political climate, Moody's sees no meaningful pressure fordebt-reducing fiscal policies," the ratings agency said. Prime Minister BorisJohnson called the Dec. 12 election in an attempt to break the deadlock overhow, and even if, the country should leave the EU, more than three years afterthe Brexit referendum.
Moody's said the"increasing inertia and, at times, paralysis that has characterized theBrexit-era policymaking process" showed how the UK's institutionalframework has diminished. Even once Britain was out of the EU, uncertaintywould remain because of the "significant challenges" of reaching afuture trade deal with the bloc, it said. Any signs that Britain was unable toreplicate the benefits of EU membership with trade deals in Europe and beyondwould also be negative for the rating.
Moody's, whichstripped the country of its AAA rating in 2013 and downgraded it again in 2017,said it was lowering the outlook on Britain's current Aa2 rating to negativefrom stable, meaning the rating could be cut again. At Aa2, Britain is on thesame level as France but below Germany's AAA rating by Moody's.
Moody's said thegovernment, after reducing a budget deficit which leapt to 10 percent of GDP in2010, had been increasingly willing to "move the goalposts" on makingfurther progress.
"Successivegovernments have announced large, permanent increases in public expenditures,most notably a large increase in spending on the National Health Service,outside the normal calendar for fiscal policy changes and without detailedpolicy plans," it said. Last month, ratings agency Standard & Poor'ssaid it would cut Britain's AA credit rating if the country leaves the EUwithout a deal, and it, too, warned that Brexit indecision was causinggovernment paralysis. - Agencies