What happens when the sovereign rating of a country is downgraded by a rating agency?

In October 2020, Moody’s the rating agency, downgraded the sovereign rating of the UK for the following reasons.

Moody downgraded the sovereign rating of the UK in October 2020 primarily due to the hit to the economy due to the Covid-18 pandemic, and due to the Brexit uncertainty.

The rating agency expects UK to grow slower due to the pandemic that has had a significant impact on the public finances. Covid-19 pandemic has impacted businesses all over the word as countries have been forced to go into lockdowns and maintain social distancing norms. This has impacted businesses that are now forced to work under additional constraints.

The rating agency expects UK to be most affected of all the other large developed countries because of the pandemic, because it relies heavily on the service industry which requires human interaction.

Brexit is another reason for Moody’s downgrade; Brexit was blamed for the weaker forecast of growth in the UK. Analysts wanted the UK prime minister to secure the Brexit deal instead of increasing the damage over the coming months. Moody’s feel that failure of the UK to reach a trade deal with the EU is likely to compound the damage inflicted by the pandemic.

The rating agency also pointed out to the weakening of UK’s legislative and executive institutions over the years, as the debt levels of UK have kept on increasing over the years, despite its austerity measures. The lowered rating put the UK on the same level as Belgium and the Czech Republic.

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