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Credit warning over EU referendum

Published 12/06/2015

The UK's referendum on the EU could affect its credit rating, experts say
The UK's referendum on the EU could affect its credit rating, experts say

A credit ratings agency has warned the UK's top-ranked AAA status has been put at risk because of the decision to hold an in/out referendum on European Union membership.

Standard and Poor's said the Tories' commitment to a public vote on whether to remain in the EU by 2017 suggested " economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated".

"A possible UK departure from the EU also raises questions about the financing of the economy's large twin deficits and high short-term external debt," it said in a statement.

"We are therefore revising the outlook to negative from stable," it concluded - meaning at least a one-in-three probability of a downgrade over the next two years.

The outlook was moved from negative to stable a year ago.

It warned that the downgrade could be a dramatic one if the UK appeared on course for a so-called "Brexit".

"Should we conclude that departure from the EU is likely over the medium term, we could lower the rating by potentially more than one notch, depending on the circumstances, such as the expected future relations with the EU.

S&P said its decision to maintain the AAA rating " reflects our opinion that the UK continues to exhibit high labour- and product-market flexibility, and a wealthy and diversified economy".

It is the only one of the major ratings agencies still to give the UK the highest rating.

But it said David Cameron's promised referendum " represents a risk to growth prospects for the UK's financial services and export sectors, as well as the wider economy".

The UK economy had " prospered inside the EU", it suggested, adding that " significant net immigration into the UK over the past decade has improved the sovereign's economic and fiscal performance".

The referendum policy was "at least partly" driven by the desire to counter the popularity of Ukip and try to prevent splits over Europe within the Conservative Party.

And the "ambitious" intention to renegotiate the UK's relationship with Brussels - at the same time as securing a new devolved settlement for Scotland - " may well take precedence over other policy imperatives, such as how to address the supply bottlenecks in UK infrastructure and in the housing market".

It said meeting George Osborne's deficit-reduction target " will prove to be difficult given our understanding that most of the planned reduction is set to take place by reducing benefits and other current public expenditure, without touching health or pensions.

A sooner-than-expected sale of the taxpayers' remaining stakes in Royal Bank of Scotland and Lloyds could also see forecasts for net general government debt trimmed by close to 2% of GDP, it warned.

A Treasury spokesman said: "Today's confirmation of the UK's AAA rating by Standard and Poor's is a clear endorsement of the resilient recovery that the Government's long term plan is delivering.

"We've cut the deficit in half, have more people in work than ever before and have seen the fastest growth of any major European economy over the past year.

"We are the first to say that this is a time of heightened risk that threatens the recovery, which is why we need to go on working through the plan that is delivering economic security.

"Central to that plan is giving the British people their first say on our EU membership in 40 years and resolving the uncertainty around Britain's relationship with the EU.

"In doing this, we are seeking economic reforms that will deliver long term prosperity for the working people of Britain and the rest of Europe."

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