LONDON - Credit ratings agency Moody's Investors Service downgraded Britain's government bond rating one notch from the top AAA to AA1 Friday, citing weaknesses in the economy's medium-term outlook.
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 British government is in the midst of a program of spending cuts designed to reduce the nation's hefty deficit, but the austerity program has failed to stimulate economic growth.
The U.K. emerged from a nine-month recession in the third quarter, when GDP grew by 0.9 per cent. But the economy contracted by a worse-than-expected 0.3 per cent in the last three months of 2012.
Treasury chief George 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.