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02 Nov 2016
London, 02 November 2016 -- The UK's Aa1 sovereign rating would be downgraded if the UK's
loss of access to the European Single Market following Brexit were to
materially weaken medium-term growth and if the credibility of
UK fiscal policy were to be undermined, Moody's Investors
Service said in a report published today.
While Moody's central view is that the UK's medium-term
economic outlook will in any event be weaker than it would otherwise have
been, the scale of the impact of Brexit on its growth prospects
will depend on the format of the UK's new trading relationship with
the EU.
Therefore a key factor in Moody's assessment of the impact of Brexit
on the UK's credit profile will be how far any new trade arrangement
between the UK and the European Union replicates EU membership,
as well as how long it takes to achieve a new settlement.
"We would downgrade the UK's sovereign rating if the outcome
of the negotiations with the EU was a loss of access to the Single Market
as this would materially damage its medium-term growth prospects",
said Kathrin Muehlbronner, a Moody's Senior Vice President
and the report's co-author. "A second trigger
for a downgrade would be if we were to conclude that the credibility of
the UK's fiscal policy had been tarnished as a result of Brexit
or other reasons." The rating agency expects that the UK
government's Autumn Statement, due on 23 November, will
likely give significantly more clarity in this area.
The report, "Government of the United Kingdom: FAQ About
the Credit Impact of Brexit for the UK and its Banks", is
available on www.moodys.com. Moody's subscribers
can access this report using the link at the end of this press release.
The research is an update to the markets and does not constitute a rating
action.
Moody's current baseline expectation is that the UK will eventually
manage to enter into some form of free trade agreement with the EU.
One scenario that Moody's considers to be realistic is a series
of accords offering access to the EU market for goods and more constrained
access for services, in particular financial services. However,
such an outcome is far from certain.
Moody's expects the negotiations to be protracted. The rating
agency does not expect to have clarity on the UK's objectives, or
on its chances of achieving them, until the negotiations are under
way. The government will start the exit process by March 2017 at
the latest. Even the withdrawal process might not be finalized
within the two-year time frame set by the Lisbon Treaty.
But once negotiations start, the agency expects that the spirit
in which they are handled by both sides will offer important insights
into the likely outcome.
Moody's will also consider other policy decisions of the UK government;
the UK will have to handle multiple, complicated policy decisions
in areas including global trade, immigration and regulation.
Given the magnitude and complexity of these decisions, the risk
is material that some might damage the UK's economic or fiscal strength.
In Moody's view, there is little likelihood that the UK will
not exit the EU.
For UK banks, the loss of passporting rights that operate across
jurisdictions would be credit negative but manageable. The greatest
impact would be felt through higher costs and increased inefficiency as
the companies restructure, leading to reduced profitability for
some time.
For more Moody's research and analysis on the credit implications
of the UK's EU membership referendum, please visit:
https://www.moodys.com/Pages/Credit-Implications-of-Brexit.aspx
Subscribers can access this report via this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1045048
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This publication does not announce a credit rating action. For
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Kathrin Muehlbronner
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
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London E14 5FA
United Kingdom
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Yves Lemay
MD - Sovereign Risk
Financial Institutions Group
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