Could The U.K. Actually Default?

Moody's MCO came out this morning and said that the AAA rating on U.K. debt could be at risk if the government can not cut its debt enough. As such, the British pound instantly weakened against the dollar and the yen, but the bigger issue here is whether the U.K. would actually default on its debt, or potentially lose its AAA credit rating. “Our central scenario is that the U.K. rating remains Aaa and the outlook is stable,” Francesco Meucci, a Moody's spokesman, said in an interview to Bloomberg. “However, slower growth combined with weaker-than-expected fiscal consolidation efforts could cause the U.K.'s debt metrics to deteriorate to a point where we would reconsider our stance.” British sterling has fallen 4% this year against the euro, as the austerity plans put forth by the government are dampening growth, and will force the Bank of England to keep interest rates on hold. Despite the weak economic data, Chancellor of the Exchequer George Osborne has repeatedly said he will not scale back his deficit reduction plans, even though the economy is slowing, and unemployment is a major issue in the U.K. The IMF backed the plans, but warned that caution also needed to be taken as well. S&P affirmed the credit rating in October, but said it may lower the rating after Osborne gave his plan for cuts. Realistically the U.K. probably will not default since the Bank of England, like the Federal Reserve, has the ability to print money. Quantitative easing is an incredibly powerful tool that will allow the most powerful of economic nations to stave off default. This does not mean however, that credit worthiness is guaranteed. The warning shots from S&P and Moody's are similar to what we have seen in the U.S., but the U.S. dollar is the world's reserve currency, the Pound is not. The U.K. could lose its investment grade rating before the U.S., which could cause even more economic issues in the region. For traders who believe that a rating cut is going to happen sooner or later, shorting CurrencyShares British Pound Ster. Trst FXB could potentially be a profitable trade, as the Pound Sterling gets hit hard. FXB is designed to track the price of the British Pound Sterling, net of trust expenses. The fund seeks to reflect the price of the British Pound Sterling. There is little if any chance that the U.K. defaults, but stranger things have happened.