S&P Cuts Britain’s AAA Credit Rating On Brexit Vote; Outlook Remains Negative

Today S&P Global Ratings cut Britain’s credit ratings from AAA to AA with a negative outlook and cited the Brexit referendum on membership in the EU as the primary basis for the downgrade.

“In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating” the S&P wrote in their downgrade report.

S&P noted Britain’s weakened financial conditions from the Brexit vote on June 23rd and said the downgrade decision “reflects the risks of a marked deterioration of  external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.”

Constitutional Issues and Credit Negative Outlook

S&P indicated that the “remain” vote in Scotland and Northern Ireland also creates wider constitutional issues for Britain as a whole and could impact the U.K.’s economic strength.

“The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence” the S&P wrote.

“The Brexit result could lead to a deterioration of the U.K.’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts. The result could also trigger a constitutional crisis if it leads to a second referendum on Scottish independence from the U.K.” the S&P wrote in their rationale.

S&P stated the “lack of clarity on these issues will hurt confidence, investment, GDP growth, and public finances in the U.K., and put at risk important external financing sources vital to the financing of the U.K.’s  large current account deficits.”

S&P wrote it is still unclear if the EU which receives 44 percent of the U.K.’s exports  will still permit the U.K. full access to the EU’s common single market on existing tariff-free terms, or impose tariffs on U.K. products.

“Future arrangements regarding the export of services, including by the U.K.’s important financial services industry, are even more uncertain, in our view. Given that high immigration was a major motivating issue for Brexit voters, it is also uncertain whether the U.K. would agree to a trade deal that requires the country to accept the free movement of labor from the EU” the S&P wrote.

S&P noted Britain’s 84 percent debt to GDP ration and claimed that fiscal consolidation will be more challenging to achieve with slower growth forecasts on the horizon due to the Brexit fallout.

“Fiscal consolidation will become harder to achieve given the slower growth, as well as in the face of rising risks of discretionary fiscal easing to arrest the economic slowdown” S&P wrote.

Two Year Negotiation Period Of Britain’s Exit In Question

The S&P explained that the official 2 year negotiation period between the U.K. and the EU may not be long enough to achieve ratification in the other 27 national parliaments and there is also risk of more exit referendum in other member states.

“While two years may suffice to negotiate a departure from the EU, it could in our view take much longer to negotiate a successor treaty that will have to be approved by all 27 national parliaments and the European parliament and could face referendums in one or more member states. While some believe the U.K. government can arrive at a beneficial arrangement with the EU, others take the view that the remaining EU members will have no incentive to accommodate the U.K. so as to deter other potential departures and contain the rise of their own national eurosceptic movements” the S&P wrote.

On Friday credit rating agency Moody’s downgraded the U.K’s credit outlook from stable to negative.

Written By:

Johnathan Schweitzer




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