1. Money
Thomas Kenny

The U.K. Loses its Top-Notch Credit Rating

By February 23, 2013

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Little by little, the rising debt loads of the developed countries are beginning to catch up with them. Following Standard & Poor's downgrade of the United States in 2011 and Fitch's downgrade of Japan in 2012, the United Kingdom is the latest country to be stripped of a top rating after Moody's knocked the U.K. down from Aa1 to Aa late Friday afternoon. Moody's and S&P both continue to assign the country their top ratings, but each has it on a "negative" outlook.

What does this mean for the markets? According to Bloomberg, the immediate reaction may be relatively muted. Not only was the move anticipated, but more than half the time, sovereign (government-issued) bonds move in the opposite direction of the rating change in 2012. In other words, if a country's rating was cut its bond market moved higher on more than 50% of the occasions.

Also, the downgrade doesn't carry major significance with regard to a country's ability to make the interest and principal payments on its bonds. A rating of Aa1 still indicates that the U.K. has a very strong capacity to meet its financial commitments, and it's almost unthinkable that bonds in this credit tiers would default.

As a result, the downgrade - while making headlines and appearing as the lead feature on the Drudge Report Saturday morning - may not have a major market impact. Still, it's another warning that at some point the growing debt of the world's major nations could begin to be felt by their bond markets. Among the 59 countries tracked by Standard & Poor's, the U.K. has the 11th-worst debt- to-GDP ratio, which still puts it in better shape than France (10th), the United States (5th), and Japan (1st). As George Osborne - the United Kingdom's Chancellor of the Exchequer - put it, "Tonight we have a stark reminder of the debt problems facing our country -- and the clearest possible warning to anyone who thinks we can run away from dealing with those problems." Unfortunately, the U.K. is just one of many countries for which that can be said.

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