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Brexit 'Paralysis' Leads Moody's to Lower Outlook on U.K. Debt -- Update

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11/09/2019 | 06:12am EST

By Alex Frangos

LONDON -- Moody's Investors Service lowered its outlook on the U.K.'s debt rating, saying the country's handling of Brexit has shown its once robust public institutions are at risk of losing their predictability and cohesiveness.

The ratings company cited the "increasing inertia and, at times, paralysis that has characterized the Brexit-era policy-making process" in stamping a negative outlook on the country's rating.

A move such as this can be a precursor to an official ratings downgrade. The U.K. Treasury didn't immediately respond to a request for comment.

For now, the U.K.'s rating remains in the second tier of developed countries at Aa2, similar to South Korea and France, but below the top notch Aaa ratings Moody's assigns to the U.S. and Germany.

Rival credit ratings company Fitch and S&P have already put the U.K. on negative credit watch.

Moody's announcement comes with a general election approaching on Dec. 12 and the question of the U.K.'s exit from the European Union unresolved. Both major political parties, Boris Johnson's Conservatives and Jeremy Corbyn's Labour Party, have vowed to boost government spending.

"No matter what the outcome is of the general election Moody's sees widespread political pressures for higher expenditures with no clear plan to increase revenues to finance this spending," the Moody's statement said.

The U.K.'s public debt is around 85% of the size of the economy, little changed in recent years, and lower than that of the U.S., whose gross public debt is around 106%, according to the International Monetary Fund. Moody's said increased spending could be good for economic growth but said fixed costs on things like health care, and lower business investment as a result of Brexit could leave the country's balance sheet vulnerable.

Markets appear sanguine about the U.K.'s debt sustainability. Yields on government bonds are near their lowest rates ever. Benchmark 10-year U.K. gilts, as government bonds are known, sport a yield of 0.79%.

The price of the U.K.'s credit default swaps, a type of insurance investors can take out against the risk a borrower defaults, also remains extremely low.

In September 2017, just over a year after Britain voted to leave the European Union, Moody's downgraded Britain's rating from Aa1 to Aa2 in part because it forecast a Brexit-linked economic slowdown.

Write to Alex Frangos at alex.frangos@wsj.com

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