Just as individuals have credit ratings, so do countries. A downgrade in an individual’s credit rating can be disappointing and affect the financial situation the person finds themselves in. However when a country is involved, there can be even bigger consequences.
In this case, the UK now has the AA+ rating instead of the AAA rating it had before. The government – and in particular the Chancellor George Osborne – has been eager to step forward to speak about the downgrade. While they were understandably disappointed at the outcome, they were quick to make it clear they still believed in their austerity plan for the future.
However, there is more to this story than immediately meets the eye. In reality, the downgrade may lead to a struggle for the British pound, which now has to compete on the currency markets after this news has been announced. It remains to be seen whether the government makes any adjustments to its policies as a result of the downgrade. However, it will be interesting to see whether the British pound manages to stay relatively stable against the Euro and all manner of other countries (particularly those in Europe) or whether it suffers. Many commentators believe the British pound will struggle in the markets on Monday 22nd April, the first day of trading after the news broke concerning the downgrade.
The UK still has a better rating than many other countries – some of which now have so called ‘junk’ status due to the Eurozone crisis. This at least should be heartening to lots of people. But this is a long term game, so will the government be pressed into investing more in the future of the UK and holding back on the austerity plan a little? One suspects not, but it will be interesting to see whether the Chancellor can continue on the same path or whether he is forced to make changes.
Keep an eye on the pound as it tackles the currency markets, to see what happens next.