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Is Moody’s downgrade in the U.K. long overdue or overblown?

In the aftermath of the sweeping decision by Moody’s to strip the United Kingdom of its vaunted Aaa status, U.K. Chancellor of the Exchequer George Osborne reiterated he wouldn’t bow to opposition calls to change economic policy. “The government should stick to its course to reduce Britain’s debt.” he added. The opposition Labour Party looked to him to switch his focus from acute deficit reduction to growth – which has become particularly troublesome recently - following what it labeled as Moody’s “humiliating” decision.

Perhaps more worrying, the downgrade rekindled a fresh round of political sparring after Osborne repeatedly cited the recovery of the top rating as a bulwark for his economic policy. Simultaneously, investors and economists reaffirmed that rating changes are more often than not a generally poor indicator of fiscal health across entities. After all, U.S. and French yields are lower than they were when rating companies downgraded the nations over the past two years – perhaps not a point to boast of.

“The rating change tells us only what we already knew,” wrote Rob Wood, an economist at Berenberg Bank. Still, “the change could put a little more pressure on sterling, a lot more pressure on Osborne, and may dent near-term growth a little.” Indeed, the U.K.’s runaway debt burden has roiled the government’s balance sheet, a trend that is unlikely to be reversed before 2016, Moody’s cited. While the U.K. retains “considerable structural economic strengths,” expected slow growth of the global economy and the reduced speed of debt reduction in the country led to the decision, the company added.

Others have taken a different perspective on the matter, as the Moody’s announcement was deemed “old news and it is behind the curve,” wrote Stuart Thomson, at Ignis Asset Management. “Other agencies may follow it, but at Ignis we think the U.K. economy is doing far better than Moody’s thought.”

In addition, yields on sovereign securities moved in the opposite direction from what ratings suggested in 53% of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. That’s worse than the longer-term average of 47%, based on more than 300 changes since 1974. As such, investors have ignored 56% of Moody’s rating and outlook changes and 50% of those by S&P.

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