U.K. Credit Outlook Lowered By Moody’s; Brexit Hangover Lingers

The Brexit Leave vote to leave the EU on Thursday washed away 2 trillion from global markets on Friday and British citizens are facing a hangover after the British pound took a pounding on Friday, losing 10 percent of its value following Thursday’s Brexit vote, dropping to a 31 year low, as lingering questions persist about London’s future as Europe’s premier financial center and Moody’s moved to lower Britain’s outlook to negative from stable with their Aa1 credit rating, citing a prolonged period of uncertainty that remains for the world’s 5th largest economy.

Moody’s wrote in a report published on Friday, “The UK’s decision to leave the European Union will lead to a prolonged period of uncertainty that will weigh on the country’s economic and financial performance and will be credit negative for the UK sovereign and other rated entities.”

The fallout from Britain’s exit from the 28 member European Union means that the U.K. will be faced having to renegotiate trade deals with a host of other international countries and eventually miss out on having full access to the EU’s  trade barrier free single market.

Moody’s report cited uncertainty over the U.K.’s future trade deals in the near term as a catalyst for the negative outlook.

“During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU and other countries, the UK’s growth prospects would be materially weaker than currently expected” Moody’s wrote on Friday.

Some of the other drivers behind Britain’s lowered negative outlook include “policy predictability and effectiveness of economic policy-making” which they said is an important aspect of institutional strength and could be somewhat diminished as a consequence of the vote.

Besides renegotiating new trade deals, the U.K. will have to make changes with the government’s immigration policies and regulatory policies.

Moody’s still considers the UK’s institutional strength to be very high but noted “the challenges for policymakers and officials will be substantial.”

Moody’s cited weaker GDP growth and challenges to institutional strength as reasons for claiming the U.K’s public finances will be weaker than Moody’s has assumed so far.

“In Moody’s view, the negative effect from lower economic growth will outweigh the fiscal savings from the UK no longer having to contribute to the EU budget” Moody’s stated in their credit report on Friday.

The UK government has one of the largest budget deficits among advanced economies, and Moody’s believes that weaker growth in the U.K. could hamper the government’s ability to implement the government’s multi-year fiscal consolidation plan.

“Consequently, the public debt ratio will likely remain higher than the rating agency previously expected” Moody’s wrote.

U.K. voters in the “Leave side” were overwhelming older white pensioners outside of London with lower education and of the working class while the vast majority of Londoners voted in favor of remaining in the EU alongside voters in Scotland and Northern Ireland.

Slow wage growth in the U.K. since the global recession and uneasiness about the EU’s open border immigration policies especially about job relocation scared away many British citizens from the EU and helped to drive Britain away from Brussels.

Paying subsidies towards the EU’s budget and seeing little in return also soured the British public and resulted in more distrust about Brussels’s regulatory practices.

The fallout of Britain’s June 23 referendum could heighten the risk of political disintegration within the EU, especially if popular support for the bloc fades among member states.

Referendum calls have already been made by right leaning political groups in France and the Netherlands.

Geert Wilders, founder and leader of the Dutch Party for Freedom, tweeted out his message of congratulations to Britain and said he thinks the same could be done in the Netherlands.

French National Front leader Marine Le Pen called for a similar referendum in France.

Scotland

After the Brexit vote to leave the EU, Scotland is seeking to remain in the EU and is pursuing immediate discussion with its EU partners to remain in the EU bloc.

Scottish First Minister Nicola Sturgeon is inviting all EU diplomats based in Scotland to a summit in Edinburgh during the next 2 weeks that will bypass the U.K. government and implement an advisory panel to advise her government about options for retaining EU membership.

On Saturday EU foreign ministers from six EU member countries held a meeting in Berlin and expressed a desire to have Britain exit the EU as soon as possible by invoking article 50 of the Lisbon Treaty that triggers the official procedure for the U.K. leaving the EU which comes one day after the European Commission released a joint statement following the Brexit vote that states:

“We stand ready to launch negotiations swiftly with the United Kingdom regarding the terms and conditions of its withdrawal from the European Union.”

British PM David Cameron announced yesterday that he would delay the invocation of article 50 until October when his successor was in place.

On Tuesday EU leaders will meet in Brussels for a 2 day summit meeting about the Brexit outcome.

Written by:

Johnathan Schweitzer

schweitz31@gmail.com

aj

 

About Johnathan Schweitzer 1388 Articles
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