Downgrade is turning point in how UK is viewed

From Mr Tom Brown.

Sir, You are right (“A self-inflicted embarrassment”, editorial, February 25) to characterise Moody’s downgrade of the UK to Aa1 as being immediately more a matter of political embarrassment than a reflection of some sudden change in the UK’s creditworthiness. But you are wrong to dismiss it as merely of symbolic significance, since you yourself acknowledge that public debt ratings have direct consequences for asset allocation and risk management. With a “split” rating an important psychological barrier has been broken, as it will now be easier for any of the agencies to issue further downgrades without having to bear the responsibility for being the first to call into question a rating that hitherto was clear-cut. It might be said that the UK has “enjoyed the benefit of the doubt” because of its long-term track record of servicing its foreign currency debts, but a turning point has been reached at which, if the numbers no longer warrant it, the UK will find itself judged every bit as stringently as countries with more volatile rating histories.

Triple-A rated countries often enjoy virtually unlimited country limit allocations for foreign banks’ cross-border lending; further downgrades will inevitably lead to foreign banks and investors curtailing their UK business, which, considering the issues confronting UK banks already with ring-fencing and higher capital requirements, may have a damaging effect on credit-starved British businesses. Moreover, the downgrade unfortunately fits with a pattern of a gradual erosion of the key advantages promoted by the UK over decades to attract foreign direct investment. Prime minister David Cameron has announced that the UK may leave the EU if he cannot negotiate a more distant relationship from the rest of the EU. As it is, the UK already makes itself the most inconvenient country to visit in Europe through its self-exclusion from the Schengen zone, and with the possibility of EU exit, loss of triple-A status and a depreciating currency playing havoc with any future investment return assumptions, many foreign investors will increasingly ask why they should prefer the UK to Belgium, Ireland or Sweden.

Commercial and political advantages built up over centuries usually erode only very slowly in peacetime, but no one should be in any doubt that the UK will need to show that it can return to growth and remain fully engaged in Europe if it is not to slide towards a widespread loss of confidence.

Tom Brown, Senior Credit Executive, Norddeutsche Landesbank, London EC2, UK