Friday, 24 June 2016

The Reality of Brexit: Farewell to the UK's last AAA rating

Moritz Kraemer, chief ratings officer for S&P Global Ratings (the new name for Standard & Poor’s), stated today that the UK’s AAA rating was no longer “tenable” under the circumstances and would be downgraded at least one notch “within a short period of time”. While it is unclear what effect this downgrade will have, the only certainty is that it will heap insecurity upon insecurity, adding to the markets’ troubles and further raising the cost of government borrowing.

Other leading CRAs, notably Moody’s and Fitch, had already downgraded the UK prior to the start of the referendum campaign. Moody’s, which currently assigns the UK a rating of AA1, one notch below a AAA score, had previously warned of further downgrades following a vote to leave the EU. Moody’s has also warned that a UK exit of the EU could also see downgrades of UK businesses, impacting on their ability to borrow and, consequently, reducing their ability to invest. The referendum outcome is “credit negative” and could “increase the risk of political fragmentation within the EU if popular support for the bloc fades among member states”.

Fitch had also downgraded the UK prior to the Brexit debate, and has assigned a rating one notch below AAA since 2013. However it has also warned of short-term disruption and long term risks for the UK. In less dramatic language, Fitch Ratings described Brexit as “moderately credit negative” for the UK, and expects knock-on downgrades for UK entities to be relatively limited in the short term.

All three CRAs, while repeating the negative effect of the vote, stress the importance of the deal that Britain can strike with the EU as a principal factor in determining mid to long term ratings, both for the sovereign and entities.