Rating downgrade: Q&A

Why has the UK been stripped of its AAA rating?

Moody's said the main reason was the evidence that Britain's economic growth would remain sluggish for a few years. The slower-than-expected recovery has made it hard for George Osborne to meet his own deficit reduction targets. A debilitating debt pile meant the UK was less able to deal with potential economic or financial shocks. On a more positive note, the agency said a combination of political will and underlying economic strengths would, in time, allow the government to reduce the debt burden.

Why has the downgrade happened now?

The timing was a surprise: most economists were expecting the rating agencies to wait for the budget on 21 March before showing their hand. But Moody's decided to move because of the UK's "high and rising debt burden", as made clear by the public finances data published last week.

Are the other agencies likely to follow?

Moody's has placed the UK's rating on a "stable footing" but Fitch and Standard & Poor's have it under review for a potential downgrade. Fitch is expected to jump first: economists predict a UK downgrade within two weeks of the budget. Standard & Poor's might wait longer, being the last to put the rating under review last December. Some economists think it may not act until next year.

What will it mean for the budget?

The chancellor said the downgrade had redoubled his resolve to deliver his recovery plan, but the news will add to tensions in the coalition . The Liberal Democrats have so far remained publicly united behind Osborne, but some have spoken privately about concerns that Plan A is not working. Growing evidence to that effect will pile on the pressure for the chancellor to ease off on austerity measures and loosen the purse strings to invest in growth.

Does it matter?

Yes and no. It matters enormously to Osborne, who pinned his credibility on keeping the AAA rating. But the financial markets have been expecting this, so traders have already factored in much of the impact. The news will put pressure on the pound, which has been falling against the dollar all year, and that will drive petrol prices higher, as oil is traded in dollars. Economists predict a 2-3% rise over the next few months.

What will mean for interest rates?

The government's borrowing costs have been rising since the third quarter of last year, but that is largely due to rising inflation and an improving outlook in the eurozone, which diminishes the appeal of the UK as a safe haven. Economists do not expect borrowing costs to move much as a result of the downgrade, because investors tend to take their own view on a country's ability to pay its debts, rather than rely on the rating agencies. What's more, there are so few economies left with an AAA rating from all three agencies, investors have very little choice of "safe havens".

What countries are still rated triple-A by all three agencies?

The only countries left with a gold-plated rating from all three agencies are Australia, Canada, Denmark, Finland, Germany, Luxembourg, Norway, Netherlands, Singapore, Sweden and Switzerland. But the UK is in good company with this downgrade, which puts it on a level with France and the US.

Josephine Moulds