Britain has been threatened with the loss of its AAA credit rating amid fears over weaker growth prospects and potential shocks from the eurozone crisis, it was confirmed here Tuesday.
Ratings agency Moody's last night put the UK on "negative outlook", increasing the chance of the country being stripped of its AAA status, economists said.
Britain's Chancellor, Finance secretary, George Osborne said the assessment was a vindication of the Government's tough austerity measures and "a reality check for anyone who thinks Britain can duck confronting its debts".
Moody's downgraded the ratings of six countries and also put France and Austria on the same caution as the UK amid violent protests in Greece over stringent measures to secure a fresh bailout.
Explaining its decision on the UK's prospects, it pointed to "increased uncertainty regarding the pace of fiscal consolidation in the UK due to materially weaker growth prospects over the next few years".
"Any further abrupt economic or fiscal deterioration would put into question the Government's ability to place the debt burden on a downward trajectory by fiscal year 2015-16," it said.
It also predicted that the "high risk of further shocks (economic, financial, or political) within the currency union are exerting negative pressure".
Osborne said "This is proof that, in the current global situation, Britain cannot waiver from dealing with its debts. Moody's are explicit that it is only the Government's 'necessary fiscal consolidation' that is stopping an immediate downgrade, which would happen if there were any 'reduced political commitment to fiscal consolidation including discretionary loosening'.
"This is a reality check for anyone who thinks Britain can duck confronting its debts." Moody's said it foresaw three main risks to the UK's top rating, the first being a combination of ongoing slow growth with "reduced political commitment to fiscal consolidation" or a "failure to respond" to worsening conditions.
Other dangers were "a sharp rise in debt-refinancing costs, possibly associated with an inflation shock or a deterioration in market confidence over a sustained period" or a fresh crisis in the banking sector.
The AAA rating "continues to be well supported by a large, diversified and highly competitive economy, a particularly flexible labour market, and a banking sector that compares favourably to peers in the euro area", it noted.
Significant structural reforms meant the economy was expected to return to 2.5 percent trend growth rate even if more slowly than previously anticipated, Moody's said.
"Although Moody's sees rising challenges in achieving debt reduction within the timeframe that has been laid out by the Government, not least the possible impact of any future cutbacks on short-term growth, the rating agency believes that the UK government's response to negative developments late last year indicates its commitment to restoring a sustainable debt position.
"This suggests that the UK's track record of reversing increases in debt is likely to continue going forward." The countries which saw their credit rating downgraded were: Italy, Malta, Portugal, Slovakia, Slovenia and Spain.
It came as the Greek government was challenged by the EU to "sell" its latest austerity deal to the public and end a "spiral of unsustainable finances" after rioters wreaked havoc on the streets of Athens in response to more cuts. Opposition Labour Shadow chancellor Ed Balls said the move was "a significant warning" and urged the Government to spark economic growth.
He said "Moody's is clear in its statement that the primary reason for Britain's negative outlook is 'weaker growth prospects' which are making it harder to get the deficit down.
"With our economy now in reverse, unemployment at a 17-year high and 158 billion pounds extra borrowing to pay for economic failure, the case for a change of course and a real plan for jobs and growth is growing by the day." Meanwhile, Downing Street said Prime Minister David Cameron called US president Barack Obama last night to discuss a range of issues including the eurozone crisis and "the need for a sustainable and credible plan to ensure the financial stability of the euro".