Moody's downgrades UK rating from AAA to AA1

LONDON (AP) -- Credit ratings agency Moody's Investors Service downgraded Britain's government bond rating one notch from the top AAA to AA1 Friday, saying sluggish growth and rising debt were weakening the country's medium-term outlook.

Treasury chief George Osborne said the blow only redoubled his resolve "to deliver our economic recovery plan," based on deep spending cuts.

Moody's said "subdued" growth prospects and a "high and rising debt burden" were weighing on the British economy.

The agency said rising debt meant "a deterioration in the shock-absorption capacity of the government's balance sheet, which is unlikely to reverse before 2016."

It said, though, that "the U.K.'s creditworthiness remains extremely high," and its outlook was stable.

Moody's said that "a combination of political will and medium-term fundamental underlying economic strengths will, in time, allow the government to implement its fiscal consolidation plan and reverse the U.K.'s debt trajectory."

For the British government, the move was unwelcome but not unexpected. All three of the big rating agencies — Moody's, Standard & Poor's and Fitch — had placed Britain's rating on negative watch, as the economy continues to struggle.

The Conservative-led government is cutting 50 billion pounds ($80 billion) in spending through 2015 in a bid to slash the national debt, which stands at more than 1 trillion pounds, over 70 percent of GDP.

Moody's said it expected that level to peak at just over 96 percent of GDP in 2016.

Public sector borrowing remains stubbornly high, and is forecast by the government's Office for Budget Responsibility to be 120 billion pounds for 2013.

Critics say the government's austerity policy has failed to kick-start the economy, which has been through two periods of recession since 2008.

The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 percent. But the economy contracted by a worse-than-expected 0.3 percent in the last three months of 2012.

Glimmers of good news for the government include a stable unemployment rate — 7.8 percent in the last quarter — and low interest rates.

The yield on the 10-year Treasury bond fell over the year from 2.29 percent in February of 2012 to 2.11 percent now.

Osborne said in a statement that the downgrade was "a stark reminder of the debt problems facing our country," with a debt accumulated over the years exacerbated by Europe's economic crisis.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it," he said, promising to press on with debt-cutting.

"We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs," Osborne said.