Britain defends cuts after negative Moody's outlook

(LONDON) - British Finance Minister George Osborne defended his government's deep public spending cuts on Tuesday after Moody's said the country risked losing its pristine Aaa credit rating.

The influential agency downgraded the debt ratings of six European Union countries and placed negative outlooks on the top Aaa ratings of France, Britain and Austria, blaming ongoing fallout from the eurozone crisis.

It pointed to "materially weaker growth prospects" over the coming years for its warning on Britain.

Osborne, the Chancellor of the Exchequer, insisted the assessment justified the austerity measures being implemented by the Conservative-Liberal Democrat coalition government, aimed at reining in Britain's budget deficit.

"What this credit ratings agency is warning us of today is very clear," he told BBC radio.

"They say Britain's rating would be downgraded if there was a reduced political commitment to dealing with our debts, if there was any extra discretionary spending or borrowing.

"If you don't have confidence in a country's ability to pay its debts, as you have seen with plenty of other European countries, then you get negative growth, rising unemployment, and no prospect of recovery.

"That is precisely why I don't see this false choice between growth and dealing with your debts."

The British economy shrank more than expected in the fourth quarter of last year, with gross domestic product dipping 0.2 percent because of weakness in the production and construction sectors.

Last week, the Bank of England said it would pump an additional GBP 50 billion ($78.6 billion, 59.7 billion euros) into the economy through its Quantitative Easing programme in a bid to stop the country slipping back into recession.

The central bank also said it would keep interest rates at 0.50 percent.

Analysts said the record low rate, combined with government's commitment to spending cuts, left the coalition with few options to boost growth.

"With fiscal policy constrained and monetary policy already extremely loose, there seems little the authorities can do but cross their fingers and hope the demand outlook improves," said Simon Hayes of Barclays Capital.

Britain's biggest employers' group predicted on Monday that the economy will rebound and narrowly avoid recession -- defined as two straight quarters of contraction -- with 0.2-percent growth in the first three months of 2012.

But the Confederation of British Industry (CBI) slashed its annual growth forecasts, blaming the eurozone debt crisis, saying it now expected the economy to expand by 0.9 percent in 2012 and by 2.0 percent next year.

The main opposition Labour party, which the government has blamed for creating the deficit before it left office in 2010, said the coalition was damaging recovery by slashing public spending and raising taxes too quickly.

"The message is plough on, dig a deeper hole," said Labour's finance spokesman Ed Balls. "It's time people said this isn't working."

Moody's identified three main threats to Britain's Aaa rating, including a combination of slow growth and "reduced political commitment" to lowering the deficit.

Other dangers were "a sharp rise in debt-refinancing costs" or a fresh crisis in the banking sector.

Britain and France were locked in a war of words in December after the head of the French central bank suggested Britain deserved to lose the treasured triple-A rating.

France lost its triple-A rating from another leading ratings agency, Standard and Poor's, last month.