MercoPress. South Atlantic News Agency

Moody's praises UK management but warns of “formidable and rising challenges”

Top marks for Chancellor George Osborne’s economic governance

Ratings agency Moody's has given the UK high scores for economic governance but warns the country it faces “formidable and rising challenges”.

In its annual guidance for investors, Moody's says the UK has “significant structural strengths” and deserves its top AAA rating. But it says weakness in the Euro zone could hold back growth and weaken the government's debt-cutting plans.

Rating agency opinion affects the cost of borrowing. Moody's, along with Standard & Poor's and Fitch, are the most influential agencies and a downgrade by one or all of them can drive up a country's borrowing costs.

Strengths highlighted by the report include long-term economic fundamentals, and institutional and government financial strength. But, it said: “A need to support the banking system could temporarily set back the government's fiscal consolidation efforts.

”As a result, the outlook on the rating is likely to be sensitive to future developments in the euro area's debt crisis, even though the UK is not a member of the monetary union.“

Moody's recently placed the credit ratings of all Euro zone countries under review.

It said the UK was only partially cushioned from the crisis: ”The outlook on the rating is likely to be sensitive to future developments in the Euro area's debt crisis, even though the UK is not a member of the monetary union.“

But it praised the UK as ”one of the most competitive of the large advanced economies in the world“ and for its ”track record of reversing increases in debt over many decades“.

The agency added that the independent financial watchdog, the Office for Budget Responsibility, which was set up by the coalition government, had helped strengthen the country's fiscal institutions.

Last week Fitch Ratings lowered its outlook on France's triple-A rating to ”negative“ from ”stable. The rating agency also warned it may downgrade France and six other Euro zone countries in the future as it believes that a comprehensive solution to the region's debt crisis is “technically and politically beyond reach.”

France's possible downgrade is not imminent but could come in two years, Fitch said, as it revised the outlook to the country's AAA rating to negative.

For the other countries - Belgium, Cyprus, Ireland, Italy, Slovenia and Spain - a downgrade could come much faster. Those nations, which already had a negative rating outlook, were placed on credit watch negative, which traditionally signals the possibility of a downgrade within three months.

“The systemic nature of the Euro zone crisis is having a profoundly adverse effect on economic and financial stability across the region,” Fitch said in a statement.