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Moody's: Loss of single market access could see UK's sovereign rating cut

Published 02/11/2016

Moody's first slashed Britain's credit outlook from stable to negative in the immediate aftermath the Brexit vote
Moody's first slashed Britain's credit outlook from stable to negative in the immediate aftermath the Brexit vote

Britain's sovereign rating could be slashed if growth forecasts slump as a result of an exit from the single market, Moody's has warned.

The ratings agency said it will also consider the UK's subsequent free trade agreements, the potential loss of so-called passporting rights for the financial services sector and the Government's economic plans in any downgrade action.

Kathrin Muehlbronner, senior vice president at Moody's Investors Service, said: "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.

"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."

A further downgrade would be a blow to the UK's international reputation, signalling weaker confidence in Britain's economy.

Moody's first slashed Britain's credit outlook from stable to negative in the immediate aftermath the Brexit vote, while also revising its outlook for the UK banking sector from stable to negative.

Ratings peer Standard & Poor's also downgraded the country's sovereign rating by two notches following the referendum, from AAA to AA, while Fitch cut its rating from AA+ to AA.

Moody's explained it would be paying close attention to the Autumn Statement on November 23, which will "shed light" on Government plans regarding the fiscal deficit and rising public debt.

"More generally, we will assess the effectiveness and credibility of the UK's economic policy-making given the multitude of complex decisions the Government will need to make," Ms Muehlbronner said.

While a "wide-ranging" free trade agreement could help offset Brexit's impact on UK growth, Moody's said this remains a "plausible but not certain outcome".

Cross-border agreements regarding goods trade are likely to be less controversial than those covering services, especially financial services which play an important role for the UK economy.

But the agency said it will be waiting to hear more on the trajectory of Britain's Brexit negotiations.

Ms Muehlbronner said: " The protagonists' opening positions offer few insights into possible areas for compromise. Even the withdrawal process might not be finalised within the two-year time frame set by the Lisbon Treaty.

"But once negotiations start, we expect that the spirit in which they are handled by both sides will offer important insights into the likely outcome. In our view, there is little likelihood that the UK will not exit the EU."

Tory former business minister Anna Soubry issued a statement via the Open Britain organisation, which campaigns for the closest possible post-Brexit ties with the EU, insisting the UK must stay in the single market.

"A downgrade of our credit rating would make Government borrowing more expensive, which means there will be less to spend on public services.

"This warning from Moody's points to one very clear conclusion. The best way to protect our economy is for the Government to negotiate to stay in the single market, which gives our businesses free access to 500 million consumers, the biggest market in the world."

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