Enter multiple symbols separated by commas

UK May Be OK to Lose AAA After All

‘Good Recession’ to Boost UK—But Not Until Next Year
Gonzalo Azumendi | Image Bank | Getty Images

The day when the U.K. loses its coveted AAA credit rating, the preservation of which the current government made a key tenet of its economic targets, seems to be moving closer.

Standard & Poor's announced it had downgraded its outlook to negative late Thursday, meaning that all three major international agencies now have the country on negative watch. Moody's may be the first to downgrade – it has pledged to revisit the rating in early 2013.

(Read More: UK On Negative Watch )

Yet the impact of a downgrade could be relatively small for the U.K. Even Chancellor of the Exchequer George Osborne has downplayed the importance of the U.K.'s rating in recent weeks.

"It's one test alongside others, but the ultimate test is what you can borrow money at," he told other politicians in the U.K.'s parliament Thursday.

First of all, other major economies including the U.S. and France have suffered downgrades without a resultant spike in bond yields (which determine the cost of debt).

Second, much of the bad news for the U.K., including the deterioration in its public finances, and the threat of a triple-dip recession,is already priced in by stock markets.

A downgrade would be more symbolic than catastrophic, Simon Wells, chief UK economist at HSBC, told CNBC.

(Read More: Why Downgrade Wouldn't Be a Big Deal)

"We have survived a lot of crises with triple-A and this looks increasingly like it will be the crisis that drops the rating, but I don't think it will have huge implications," he said.

"It's really the debt position that the rating agencies are focusing on."

The U.K. has become something of a safe haven when compared to its euro zone neighbors in the bond markets. Zachary Latif, managing director at TLG Capital, told CNBC that the effect of a downgrade in yields would be "not that much."

"UK gilts are going to be a sure thing anyway," he added.

"Securities are also about the underlying issuer…The real issue is what happens at the euro zone level."

Sterling would probably suffer some decline in demand in the immediate aftermath of a downgrade, but this would not be a "sustained" weakness, according to Josh O'Byrne, currency strategist at Citi.

Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc.

Contact Europe News


    Get the best of CNBC in your inbox

    Please choose a subscription

    Please enter a valid email address
    To learn more about how we use your information,
    please read our Privacy Policy.

Europe Video

  • Fed meeting: What to expect

    Beth Ann Bovino, chief U.S. economist at Standard & Poor's, weighs in on what to expect from the Federal Reserve meeting this Tuesday and Wednesday.

  • Obamacare effect on healthcare earnings

    Joseph France, research analyst in healthcare at Cantor Fitzgerald, talks about the current state of healthcare stocks in the U.S.

  • What stocks can move US markets higher?

    Very few stocks are driving small gains on the Nasdaq and S&P. Is this an indicator that it's time to sell? Carter Worth, head of technical analysis at Cornerstone Macro, discusses.