The most important fallout from a downgrade will probably be political. George Osborne has hung his hat on the UK keeping its rating, and Labour is unlikely to spare his blushes if the hat stand gets shaky. The triple-A rating survived economic blows like the 1978-9 “winter of discontent”, which swept Margaret Thatcher to power, and Black Wednesday, when the Conservative government had to withdraw sterling from the European Exchange Rate Mechanism.
Osborne has consistently emphasised the importance of stabilising UK debt and committing to austerity, with the maintenance of Britain’s top rating a key element. There will be plenty of political capital to be made from arguing that the UK is worse off now than under the last administration, as parties head into the second half of the current term and the election approaches.
Yet this may not be valid when the likely effects on a range of UK investments are considered. After an initial knee-jerk reaction to the news, most of the key UK markets would probably stabilise.
The FTSE 100 is now so dominated by international companies, or UK-based companies which do most of their business abroad, that a downgrade probably wouldn’t register much beyond a temporary blip.
The gilt market, too, should remain unperturbed. As HSBC analysts point out, because the UK can issue its own currency, it can always create money to finance debt. This makes it at “almost zero” risk of a pure default on repaying that debt (although of course, money-printing brings its own problems).
UK bonds are more vulnerable to falls if the country’s safe haven status is perceived to be under threat. But a one-notch downgrade, which at the moment appears to be the most likely outcome, is unlikely to send UK bonds into the kind of territory seen in many other parts of Europe.
Sterling’s valuation could potentially suffer most from a downgrade, but a weakening currency might be no bad thing for UK exports.
Ultimately, downgrades have lost much of their power to shock the market, as can be seen by France’s downgrade by Moody’s last week. They are now often both so well-flagged and, frankly, long-overdue that they don’t provoke the kind of negative reaction seen during the credit crisis.
Catherine Boyle is a writer for CNBC. You can follow her on Twitter: @cboylecnbc