With the largely political repercussions of the decision by ratings agency Moody's to warn that the UK could be stripped of its top-notch AAA debt rating continuing to rumble on, the bond analysts at M&G have attempted to calculate what the implications might be for the UK defaulting on its debt.
Richard Woolnough's conclusion is that there is nothing to worry about as the increase in the probability of the UK defaulting on its gilts – as UK government bonds are known – is just 0.17%.
On his own blog, he explains that he has weighted the Moody's analysis of the situation in the UK with the other major ratings agencies, which are not currently considering a possible downgrade of the rating.
He writes: "According to Moody's European issuer-weighted default rate data since 1985, the probability of a AA-rated default over the next 10 years versus that of a AAA is 0.55% v 0.04% (Moody's only publishes data for ratings bands, but a AA+ default probability would be even lower). So hardly a big change, despite the headlines.
"This is due to the logarithmic nature of rating scales. At the top end the agencies try to fine-tune to create a difference between strong sound investment grade credits, but that is harder to do at the bottom of the scale, as by definition the riskier speculative grade credits have less control over their potential default."
As he puts it: "Headline news, but the risk of default on gilts would remain to all intents and purposes unchanged."
