In early morning trading the FTSE 100 was down 19 points to 5886, but by lunchtime was into positive territory up seven points from the previous day’s close at 5913 – so much for a market-moving event.
The fact is that in 2009 S&P put the UK under review and nothing ever came of it, so the market doesn’t view the threat as a serious one.
Azad Zangana, European economist at Schroders, explained: "There is a 30% probability that these three sovereigns [France and Austria were also put on negative outlook] could lose their respective AAA ratings in the next 18 months.
“With regards to the UK, there is no doubt that the announcement from Moody’s will ignite fierce political debate across the political spectrum. The opposition has been arguing that the government should cut spending more slowly, and possibly even reverse some of the tax hikes in order to stimulate growth.
"While Moody’s primarily warns of a lack of growth in the medium term for the UK and proximity to the eurozone debt crisis being the key factors behind its change in the outlook, it also warns that one of the factors that would lead to an actual downgrade would be a ‘reduced political commitment to fiscal consolidation, including discretionary fiscal loosening or a failure to respond to a deteriorating fiscal outlook’.
"In our view, the change in outlook from Moody’s for the UK should be taken as a warning that any slippage in the government’s fiscal programme must be made up for with additional fiscal tightening. At the same time, the government is being warned that it must do more to boost growth through structural reforms," he added.
Digging heels
This is similar to Chancellor George Osborne’s rhetoric, which stated the Moody’s announcement was a "reality check for anyone who thinks Britain can duck confronting its debts".
But others argued the spectre of downgrades is not as scary to investors as it was before the global financial crisis.
David Miller, Partner at Cheviot Asset Management, said: "Investors are getting used to living with downgrades now, and the latest decision by Moody’s won’t change their views of the UK. It’s a story rather than a Market Mover."
Only Fidelity’s asset allocation director, Trevor Greetham, thought it might be a legitimate cause for concern and one that should prompt the government to change tack: "I would support a targeted easing of fiscal policy to keep the economy moving while the consumer pays down debt. Without growth, everything becomes more difficult."
But really, we are talking of an event that might never happen, and even if it did could surprise to the upside.
Prior to the US downgrade by Standard & Poor’s last year there was mass hysteria across media outlets.
But looking across the pond now we see improving economic indicators and healthier markets, maybe we should be lining up for the downgrades if that is as bad as it gets…
