Jonathan Portes thoroughly demolishes the case that Moody's decision to put the UK's AAA rating on 'negative outlook' should be taken seriously. I have made similar points, although less forcefully, here and here.
The key points are:
- The Ratings Agencies do not know what they are talking about when it comes to sovereign debt.
- UK government debt is denominated in pounds; the government/Bank of England can print more pounds to pay its debts if necessary, so risk of default is zero.
- Moody's economics is wrong. A worsening economic outlook means that the financial markets will move out of more risky assets such as equities into, yes, you guessed it, gilts! And, from recent experience, UK government gilts. Gilt prices should, in consequence rise, and yields fall. The cost of sovereign borrowing therefore falls.
- Forget the Ratings Agencies; the markets will.
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