US credit agency Moody’s has updated the credit rating of UK, France and Austria to “negative outlook”.
Britain’s finance minister responded by saying the country must keep its promise to slash its large budget deficit.
“This is proof that, in the current global situation, Britain cannot waver from dealing with its debts,” Finance Minister George Osborne said. “This is a reality check for anyone who thinks Britain can duck confronting its debts.”
The government in Britain has come under increasing pressure to soften its austerity measures to give a stalling economy room to breathe.
The French government said it would press ahead with its policies to improve competitiveness and growth while reducing the government deficit.
“The government is determined to press ahead with its actions to boost growth and competitiveness, notably the reform of the financing of welfare, of employment and the reduction of public deficits,” Finance Minister Francois Baroin said in a statement.
The precarious state of European sovereign finances was underlined on Monday, when the head if China’s sovereign wealth fund brushed aside an appeal from German Chancellor Angela Merkel to buy European government debt, saying such bonds were “difficult” for long-term investors.
A retreat from European government debt has already been boosting relatively high-yielding Australian and New Zealand debt, as cashed-up Asian sovereign wealth funds and other major bond investors look for safe havens to diversify their holdings.
Moody’s move on Monday follows one last month by Standard & Poor’s, which stripped France and Austria of their triple-A status, while Italy, Spain, Portugal, Cyprus, Malta, Slovakia and Slovenia were downgraded. S&P also cut the EFSF by one notch.
Also in January, rating agency Fitch downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, indicating there was a 1-in-2 chance of further cuts in the next two years.