UK's AAA rating put on 'negative outlook' by agency

The UK has seen its top-notch AAA credit rating put on a 'negative outlook' by US agency Moody's.

The agency said the decision was based on concerns over growth prospects and eurozone contagion, and the move will increase the chance of Britain facing a credit downgrade in the next 18 months.

Moody's said the UK faced three main risks to its top rating: slower growth and the possible impact on spending cuts, a sharp rise in borrowing costs due to inflation or a new crisis in the banking sector.

However, the agency noted the UK 'continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area'.

The 'negative outlook' is the lowest level of warning and can be followed by a 'negative watch' which raises the chance of a rating downgrade from 30 per cent to 50 per cent.

France and Austria were also warned that their ratings were in jeopardy as Moody's downgraded ratings for Italy, Spain and Portugal along with Malta, Slovakia and Slovenia.

Moody's said the decisions were based on the 'growing financial and macroeconomic' risks from the eurozone crisis.

'The negative outlooks reflect the presence of a number of specific credit pressures that would exacerbate the susceptibility of these sovereigns' balance sheets, and of their ongoing austerity programmes, to any further deterioration in European economic conditions and financial landscape,' the agency said in a statement.

'This is yet another organisation warning Britain that if we spend or borrow too much we're going to lose our credit rating,' Chancellor George Osborne told the BBC.

But Moody's was not the only agency in action, with Fitch lowering its ratings on four big Spanish banks, while Standard & Poor's cut its rating for the country's banking industry following recent sovereign downgrades and on concerns of funding difficulties and a weak economy.

'In our opinion, the Spanish banking system is vulnerable to turbulent capital markets because it relies to a degree on foreign funding.'

Meanwhile, Fitch cut the eurozone's largest bank, Santander, to 'A' with a negative outlook.

'The downgrade of Spain indicates a weakening of its ability to support its largest banks. However, Fitch expects the Spanish authorities to continue to show a high propensity to support these institutions,' Fitch said.

This was written for our sister website, Interactive Investor

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