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UK could lose Standard and Poor's AAA credit rating

Published 24/06/2016

Economists have started to downgrade their forecasts for UK growth after Britain voted to leave the EU
Economists have started to downgrade their forecasts for UK growth after Britain voted to leave the EU

Ratings agency Standard and Poor's has warned that Britain could lose its AAA credit rating after voting to leave the European Union.

Moritz Kraemer, S&P's chief ratings officer, told the Financial Times a downgrade was on the cards: "We think that a AAA rating is untenable under the circumstances."

The comments came after S&P previously said Britain's AAA rating depended on whether it stayed a member of the EU. Fellow ratings agencies Fitch and Moody's had already stripped Britain of its AAA credit rating before the referendum.

Moody's said the Leave vote will "weigh on the UK's economic and financial performance" with heightened uncertainty "likely to dent investment flows and confidence".

It added: "Potential changes to the UK's commercial relations with the EU, regulatory regimes, access to funding and immigration curbs are key credit risks. We expect that, over time, the UK and the EU would come to an arrangement to preserve most - but probably not all - of the current trading relationships.

"However, there are clear downside risks. Substantial new tariff or non-tariff barriers to trading goods and services would have an adverse impact on UK sectors that trade extensively with the EU market, such as automotives, manufacturing and food production."

It added: "We believe that universities and Transport for London (TfL) also face material credit risks due to the likely loss of EU funding, potential rising costs and weaker demand due to immigration curbs and slower economic growth.

"By contrast, rated utilities, banks and insurers are likely to see a more moderate credit impact from Brexit given the domestic nature of their businesses and, in the case of insurers, the use of subsidiaries in continental Europe."

Economists have started to downgrade their forecasts for UK growth, stating that Britain could head into recession unless a quick deal can be done.

IHS Global Insight said it is "substantially cutting" its GDP growth forecasts to 1.5% from 2% for 2016 and to 0.2% from 2.4% for 2017.

Capital Economics downgraded its forecast for 2016 from just above 2% to 1.5%.

Fitch said the vote for Brexit will be "credit negative for most sectors in the UK", triggered by "weaker medium-term growth and investment prospects and uncertainty about future trade arrangements".

"Brexit will be moderately credit negative for the UK sovereign and as we have previously stated we will review the sovereign rating shortly."

It added: "In the medium to long term any broader rating actions are likely to depend on factors such as the size and duration of the impact on GDP, the extent of sterling depreciation and their subsequent effect on inflation, asset prices, unemployment and interest rates.

"Failure to agree favourable trade arrangements would also be a significant negative for some sectors.

"The UK's status as a major international banking hub could be damaged as some business lines shift to the EU.

"Higher import costs and pressure on exports due to the potential imposition of tariffs would be broadly negative for corporates. The extent to which the UK would be able to limit net inward migration could be significant for some asset classes."

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