Moody’s announced on Friday night that it had cut the Government’s bond rating one notch from ‘Aaa’ – the highest possible level – to ‘Aa1’.
The move is a significant setback for Chancellor George Osborne, who has faced criticism that his strategy for dealing with UK’s huge debt burden is failing to deliver.
Moody’s pointed to “continuing weakness in the UK’s medium-term growth outlook, with a period of sluggish growth which [it] now expects will extend into the second half of the decade”.
The credit ratings agency also noted that the Government’s debt reduction programme faced significant “challenges” and that the UK’s huge debts are unlikely to “reverse before 2016?.
Inflation could rise further as an indirect consequence of Moody’s downgrade of the British economy on Friday, a former member of the Bank of England’s Monetary Policy Committee has warned.
Andrew Sentance, who served on the Bank’s rate-setting committee until May 2011, cautioned that the cut to the UK’s credit rating would add to the existing “downward pressures on sterling”.
The downgrade stripped the UK of its prize AAA credit rating amid worries about weak growth and rising debt. The rating was lowered one notch to AA1, with the outlook on the country’s debt improving to stable from negative. Sterling fell in the last half- hour of trading in New York on Friday night, dropping 0.6pc to $1.5163.
“This of itself won’t increase inflation,” Mr Sentance told The Sunday Telegraph. “But it will add to pressure on the pound, which has already fallen a long way in the space of six weeks – which is not going to help inflation.
Worries about the euro crisis have died down somewhat in recent months, but the upcoming election in Italy is giving financial markets the jitters again. And Italy is, by far, not the only cause for concern.
It was in autumn 2011: The euro crisis was getting worse and worse – and slowly spreading from smaller economies, like Greece and Portugal, to larger players, like Spain, and even Italy.
Especially controversial was Prime Minister Silvio Berlusconi of Italy, who was ridiculed for his positions and lack of action. As a result, his country’s standing reached a new low. But then there was the ‘great relief’ of November 12 when Berlusconi stepped down. His job was taken over by Mario Monit – an economics professor, who, with his plans to get the budget back in order, won a lot of sympathy and trust, not just for Italy, but for the euro currency users as a whole.
Why the rest of the world is so nervous.
Altogether, there are 3 scenarios that could shock the world.
Berlusconi wins: Berlusconi is running probably between 3-5 points in the polls. That’s a pretty consistent deficit, so he’s clearly in 2nd place, but you never know how things could break on election day. We’ve seen insiders put his odds at winning at maybe just over 10%. If he won, Italy’s reform path would be shot, its relationship with its neighbors blown, and markets would tank.
Beppe Grillo really surges: The candidate who is capturing the most attention and enthusiasm is blogger/comedian/populist/anti-banker Beppe Grillo. His new “5-Star” movement is a protest movement that’s appealing to the young and angry (thought not just the young and angry… we’ve also met professionals who like him due to his anti-corruption message). In the last two weeks, he’s seemingly gained daily in private polls, and he drew a crowd of 800,000 in Rome. He’s probably going to get at least 20% of the vote. But if his momentum continues through the weekend, and he draws more than 25%, then watch out. This will be a huge platform for a real protest candidate.
Monti folds: The unpopular Mario Monti is in the race, but has no chance of winning. However, his support will be needed, most likely, to form a coalition government with Bersani. But if Monti’s party fails to get 8% of the vote, then they’re ineligible for government, and the coalition is shot. Watch to see if he totally folds.
If any of the above happen, watch out. There will be a feeling of major Italian backsliding.
France: More Intervention Needed to Destroy the Economy Completely
by Pater Tenebrarum, Acting-Man.com:
Readers should take a look at the most recent ‘Flash’ PMI release (pdf) by Markit on France, which has been published along with with the February Flash PMI of the euro-zone (pdf). The latter shows a ‘steepening downturn’ across the euro area, with the sole exception of Germany (now the ‘only core country left’, as Mish correctly remarked).
However, France is really the standout. As Markit’s senior economist Jack Kennedy notes in his summary:
“The performance of France’s private sector economy deteriorated further in February, as a sharper fall in services activity offset a slight easing of the downturn in manufacturing. Following on from the news that GDP contracted -0.3% in the final quarter of 2012, PMI composite output data suggest that the first quarter is shaping up to be the worst since Q1 2009. The broad-based weakness across manufacturing and services leaves scant room for optimism, with a range of indicators from new orders, backlogs, employment and output prices all residing at depressed levels. Panelists reported that a general lack of confidence in the economic outlook had resulted in clients reining in spending and postponing orders, feeding further back into the downward spiral.”
Strong showing by former prime minister trying for comeback in weekend election could shake up Italian government and investors’ optimism.
FRANKFURT (MarketWatch) — Investors should consider an important question ahead of this weekend’s Italian election: Can a strong showing by Silvio Berlusconi dent a rally that’s lifted European and U.S. stocks to multiyear highs in 2013?
Italians head to the polls Sunday and Monday in a vote that’s been pegged as a referendum on the austerity and reform agenda of Prime Minister Mario Monti, the nonpartisan technocrat selected to take the reins of government after Berlusconi was forced out of office in disgrace in November 2011.
Market participants appear to have already priced in the “best-case” scenario — a center-left victory by Pier Luigi Bersani’s Democratic Party in the lower house and a Senate result that forces Bersani to team up with Monti for an upper-house majority, according to Heino Ruland, a strategist at Ruland Research in Eppstein, Germany.
That leaves European equities and financial markets in general vulnerable to disappointment, he said, but would probably leave U.S. equities unscathed.