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Announcement:

Moody's: UK sovereign rating would be downgraded if the UK was unable to conclude an agreement with the EU that protected core elements of its access to the Single Market

Global Credit Research - 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

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Kathrin Muehlbronner
Senior Vice President
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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