Moody’s downgraded the UK credit rating – So what’s it all about?
A nation’s credit rating is the same (kind of) as a person’s credit rating.
If you have a good credit score – earned through some complex calculations that take into account your payment history, earnings, financial behaviour and existing debt – then you have an easier time accessing debt then someone with a bad score.
Your credit score defines your creditworthiness. Are you worthy of credit – are you worthy of getting debt?
A country faces similar questions.
There are three main agencies that determine the creditworthiness of nations (and countries) and Moody’s is one of them (Fitch and Standard & Poors are the others) and they just decided that the UK is not as good a debt-bet as before.
Any number of factors might lead them to this conclusion but the stated reason is Brexit. The uncertainty of Brexit is making Moody’s nervous.
Does the downgrade mean anything for you or me?
Not directly… but it does impact the country so… yes, it does impact. A downgrade might mean that (potentially) the debt the UK has (we owe loads of countries a load of money) might get more expensive to service and that money will need to come from somewhere.
Imagine you have a £1,000 overdraft with 10% interest. It means that every year you are charged £100 interest.
Now imagine that interest rate becomes 20% because the bank decides you are no longer a safe bet – now your interest is £200 each year. Where do you find that extra money? You’ll need to cut out a bunch of spending so you can service your debt.
A country is the same. If debt becomes more expensive to service, money has to be cut from the national budget, or new money needs to be earned, in order to cover the larger interest payments.