Moody’s Not Concerned about UK’s Aaa Sovereign Debt Rating
Moody’s Investors Service does not think the UK government’s latest plan to help the banking system puts the UK’s Aaa sovereign debating at risk. Moody’s views the plan as generally positive for the credit quality of UK banks, corporates and securitised transactions. Moody’s report “Effect of the Government Bailout on U.K. Credits“ describes the measure as a “calculated risk” in terms of its implications for UK public financing and debt levels, but a necessary one.
The new plan “contains a more aggressively defensive stance than the previous plan, and provides at least one element of comfort regarding the ability of the government to prevent a recessionary spiral,” says Arnaud Marès, Moody’s sovereign analyst. “By adopting a more activist approach vis-à-vis targets for bank lending, the government is reducing the risk of a sharp contraction in credit in the short term, arguably the biggest single risk faced by the UK and other advanced countries.”
As for the program’s implications for the UK’s Aaa government bond rating, the rating agency says it does not view the UK as a clear outlier in the Aaa category even with the program’s additional cost.
The UK economy should have the vitality to rebound, says Moody’s. As the current crisis abates, the UK government will then be in a position to cut spending and raise taxes, to keep its levels of debt under control over time.
For the banks, the government’s measure should ease pressure on liquidity, capital and lending levels, and also, importantly, promote confidence in the banking system. In addition, the “asset protection scheme” could, in the long run, cap future losses for banks which could help their underlying profitability and internal capital generation. Assessing the program’s full credit impact, however, awaits more details.
Given that it should help free up bank capacity for lending, the programme is a positive for the corporate sector, which is facing significant refinancing needs in the coming year. Covered bond programs will improve in credit quality to the extent the banks supporting the program are strengthened, says Moody’s.
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