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| Moody's warns Brexit would risk UK's credit rating Moody's warns Brexit would risk UK's credit rating | |
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| A vote to leave the EU in June’s referendum will threaten the UK’s strong credit score, potentially pushing up the cost of government borrowing, the ratings agency Moody’s has warned. | A vote to leave the EU in June’s referendum will threaten the UK’s strong credit score, potentially pushing up the cost of government borrowing, the ratings agency Moody’s has warned. |
| On Monday the pound tumbled on growing fears of a Brexit, hitting a seven-year low against the US dollar and also weakened against other big currencies as investors pulled money out of UK assets. Currency experts said London mayor Boris Johnson coming out for the leave campaign intensified pressure on sterling. | On Monday the pound tumbled on growing fears of a Brexit, hitting a seven-year low against the US dollar and also weakened against other big currencies as investors pulled money out of UK assets. Currency experts said London mayor Boris Johnson coming out for the leave campaign intensified pressure on sterling. |
| Moody’s, which assigns scores to governments’ creditworthiness, said a new EU deal reached by prime minister David Cameron would help to alleviate some uncertainty around Brexit but that the outcome of the 23 June referendum “remains too close to call”. | Moody’s, which assigns scores to governments’ creditworthiness, said a new EU deal reached by prime minister David Cameron would help to alleviate some uncertainty around Brexit but that the outcome of the 23 June referendum “remains too close to call”. |
| In the event of a vote to leave the EU, the economic costs would outweigh the benefits, Moody’s said. Exports would likely suffer, as would investment, and policymakers would get tied up in lengthy renegotiations of the UK’s trade relations. | In the event of a vote to leave the EU, the economic costs would outweigh the benefits, Moody’s said. Exports would likely suffer, as would investment, and policymakers would get tied up in lengthy renegotiations of the UK’s trade relations. |
| “We consider it positive that the referendum will take place as soon as June, as a lengthy period of uncertainty on the part of firms and investors would damage the UK’s economic growth prospects. That said, the outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit negative for the UK economy,” said Kathrin Muehlbronner at Moody’s. | “We consider it positive that the referendum will take place as soon as June, as a lengthy period of uncertainty on the part of firms and investors would damage the UK’s economic growth prospects. That said, the outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit negative for the UK economy,” said Kathrin Muehlbronner at Moody’s. |
| Moody’s currently rates the UK Aa1, one notch below the top triple-A score. The agency said that if the public vote to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of a downgrade to the Aa1 rating in the future. | Moody’s currently rates the UK Aa1, one notch below the top triple-A score. The agency said that if the public vote to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of a downgrade to the Aa1 rating in the future. |
| The warning follows comments in December from rival agency Fitch that a vote to leave could hurt the UK’s credit score. Standard & Poor’s, the only big ratings agency still giving Britain the top ranking, has also flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy. | The warning follows comments in December from rival agency Fitch that a vote to leave could hurt the UK’s credit score. Standard & Poor’s, the only big ratings agency still giving Britain the top ranking, has also flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy. |
| Economists have said that even before the referendum outcome is known, the UK’s growth prospects could be hit by the uncertainty. Such fears were reflected on financial markets, where sterling hit a seven-year low of $1.4067, down 2.3% on the day, putting it on track for its biggest one-day fall since early 2009. | Economists have said that even before the referendum outcome is known, the UK’s growth prospects could be hit by the uncertainty. Such fears were reflected on financial markets, where sterling hit a seven-year low of $1.4067, down 2.3% on the day, putting it on track for its biggest one-day fall since early 2009. |
| Economists at investment bank Citi raised the probability of Brexit from 20-30% to 30-40% after Johnson and the justice secretary, Michael Gove, announced their support for the leave campaign. | Economists at investment bank Citi raised the probability of Brexit from 20-30% to 30-40% after Johnson and the justice secretary, Michael Gove, announced their support for the leave campaign. |
| “So far, polls still suggest that the UK is more likely to vote to stay in the EU than to leave, and indeed ‘remain’ is still our base case scenario. We expect the campaign between now and June to shift the debate from the nature of the UK’s relationship with the EU to the economic and political risks of Brexit,” Citi economists Tina Fordham and Michael Saunders wrote in a research note. | “So far, polls still suggest that the UK is more likely to vote to stay in the EU than to leave, and indeed ‘remain’ is still our base case scenario. We expect the campaign between now and June to shift the debate from the nature of the UK’s relationship with the EU to the economic and political risks of Brexit,” Citi economists Tina Fordham and Michael Saunders wrote in a research note. |
| “Having said that, following the decision of credible and popular leaders like Johnson and Gove to back the out campaign, we now increase the probability that the UK votes for Brexit.” | “Having said that, following the decision of credible and popular leaders like Johnson and Gove to back the out campaign, we now increase the probability that the UK votes for Brexit.” |
| With the referendum date now confirmed, traders warned that the pound is set for four months of volatile trading. Opinion polls are tight and financial markets are also wary of reading too much into a slim lead for the remain campaign after misleading signals from such polls in the run-up to last year’s UK general election. | With the referendum date now confirmed, traders warned that the pound is set for four months of volatile trading. Opinion polls are tight and financial markets are also wary of reading too much into a slim lead for the remain campaign after misleading signals from such polls in the run-up to last year’s UK general election. |
| “Markets are likely to become increasingly nervous on the issue, and lack confidence in polling data following the margin of failure to predict the UK general election 2015 outcome by a wide margin,” said Fordham and Saunders. | “Markets are likely to become increasingly nervous on the issue, and lack confidence in polling data following the margin of failure to predict the UK general election 2015 outcome by a wide margin,” said Fordham and Saunders. |