* Osborne says move reinforces need to cut deficit
* Labour says rating cut "humiliating" for government
* Sterling weakens but move not a shock for markets
By David Milliken and Daniel Bases
LONDON/NEW YORK, Feb 22 Britain suffered its
first ever sovereign ratings downgrade from a major agency on
Friday when Moody's stripped the country of its coveted
top-notch triple-A rating, dealing a major blow to finance
minister George Osborne.
Moody's said weak prospects for British economic growth,
which have thrown the government's deficit reduction strategy
off course, lay behind its decision to cut the rating by one
notch to Aa1 from Aaa.
Austerity has been the watchword for Osborne's fiscal policy
since his Conservative-led coalition came to power in 2010 after
an election in which he vowed to defend Britain's triple-A
rating, which can help keep down borrowing costs.
But a very slow recovery from the financial crisis has
pushed back by at least two years the government's goal of
largely eliminating the budget deficit by 2015's election.
The opposition Labour Party blames the deficit on too much
Nonetheless, Osborne insisted now was not the time to change
course. His annual budget due on March 20 is expected to show a
further deterioration in the country's fiscal outlook.
"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," he
said in a statement. "Far from weakening our resolve to deliver
our economic recovery plan, this decision redoubles it."
However, the downgrade may fuel unease amongst members of
his own party and his Liberal Democrat coalition partners that
Osborne's gamble that he could slash the deficit and ensure a
return to growth by the May 2015 election is failing to pay off.
Sterling fell by almost a cent to around $1.5160
after the downgrade, just off Thursday's fresh 2-1/2-year low,
and analysts expected it to weaken further on Monday, even if
many had seen a downgrade coming sooner or later.
"It's a pretty big deal," said Kathy Lien, managing director
at BK Asset Management in New York. "We didn't see a huge
reaction in the pound because it's late in the New York session.
But you'll see some more aggressive selling when the markets
open (in Asia) on Sunday."
Moody's said the outlook on its rating on Britain was now
stable, meaning any further change is unlikely for the next year
Britain joins the United States and France in having lost
its triple-A rating from at least one major agency, after
holding a top-notch rating from Moody's and Standard & Poor's
since 1978, and from Fitch Ratings since 1994.
Moody's said that despite considerable economic strengths,
Britain's growth was likely to be sluggish due to a mix of
weaker global economic activity - especially in the euro zone -
and a drag "from the ongoing domestic public and private-sector
"This period of sluggish growth poses challenges to the
government's fiscal consolidation program, which we now assume
will extend well into the next parliament," Moody's analyst
Sarah Carlson said in a telephone interview with Reuters.
But Ed Balls, the Labour Party's main spokesman on finance
issues, said the Moody's decision should be a wake-up call for
Osborne ahead of his annual budget statement as Chancellor of
"This credit rating downgrade is a humiliating blow to a
Prime Minister and Chancellor who said keeping our AAA rating
was the test of their economic and political credibility."
"The issue is no longer whether this Chancellor can admit
his mistakes but whether the Prime Minister can now see that,
with UK economic policy so badly downgraded in every sense,
things have got to change."
Howard Archer, chief UK economist at IHS Global Insight,
said a new approach from Osborne was improbable.
"The strong likelihood is though that it will not materially
lead to a change in his plans."
Changes are more likely from the Bank of England, which
surprised markets earlier this week after it revealed that
Governor Mervyn King and two other policymakers favoured
restarting bond purchases to boost the economy.
They remained in the minority among their fellow
policymakers but economists increasingly expect more stimulus
eventually by the central bank.
This - and the central bank's tolerance of above-target
inflation - have combined to put pressure on sterling while
leaving British government debt relatively shielded.
Charles Diebel, a fixed income strategist at British bank
Lloyds, was sanguine about the impact of the downgrade on gilts,
as U.S. and French debt was not badly affected when these
countries lost their triple-A ratings.
"This has been speculated as inevitable and is most likely
largely in the market. I would expect only very limited damage
to the gilt curve and to sterling. Historically, losing your AAA
is actually a bond bullish event," he said.