There’s a lot of talk that the UK may lose its AAA debt rating. When this happened in the US government bond yields fell. So does it really matter? On the face of it no. In a world of increasing risk AA still looks attractive particularly if the market’s liquid. But if AA becomes a reality you have to ask yourself a few questions. Will it stop there? Can we draw a line in the sand or would the policy consequences of such action make the government unelectable? Could the rating fall a notch further to A? One key variable is economic growth. If the economy fires up things look much better. But putting this aside, what do the scenarios look like? UK banks now hold substantial gilt liquidity buffers. If these ever need to be used as intended the resultant liquidation would run the risk of a disorderly gilt market. A risk that substantially increases as the UK credit rating deteriorates. (Indeed I am not certain how Gilts qualify as buffer assets if the rating falls to single A). Add to this the possibility that the Bank may need to reverse Quantitative Easing and the reality is that the policy decision will be stymied without much higher interest rates. This is a vicious circle as both public and private sectors end up with rising debt servicing costs. If the UK gets downgraded be assured that much emphasis will be placed on playing down the importance of triple A. This entirely misses the point. What you really need to consider is whether the line in the sand could be crossed. Will the government commit to a ratings floor? Unlikely. But if it doesn’t, market perception could be even more damaging than further credit migration.