United Kingdom Sees Credit Downgrades in Wake of Brexit

brexitThe Brexit vote for the United Kingdom to leave the European Union continues to have wide-ranging ramifications for the British and global economy. On Monday, Fitch and Standard & Poor, two of the three main credit rating agencies, moved to downgrade the credit ratings for the United Kingdom. Standard & Poor moved the United Kingdom down two notches from AAA to AA. AAA is a perfect credit rating. Fitch, on the other hand, moved Great Britain down one notch, albeit down to AA from AA+. Moody’s, the third credit rating agency, reaffirmed the United Kingdom’s credit rating of AA1, but changed its outlook to negative.

Fitch and S&P also have Great Britain’s outlook as negative.

Fitch said in a statement that it “believes that uncertainty following the referendum outcome will induce an abrupt slowdown in short-term GDP growth, as businesses defer investment and consider changes to the legal and regulatory environment. While recognising the uncertainty of the extent of the negative shock, Fitch has revised down its forecast for real GDP growth to 1.6% in 2016 (from 1.9%), 0.9% in 2017 and 0.9% in 2018 (both from 2.0% respectively), leaving the level of real GDP a cumulative 2.3% lower in 2018 than in its prior ‘Remain’ base case.”

In addition, “The outcome of the referendum has precipitated political upheaval, including the announced resignation of the Prime Minister, contributing to heightened uncertainty over government economic policies and diminished scope for policy implementation at the current conjuncture.”

Fitch also makes reference to Scottish First Minister Nicola Sturgeon and her intentions for a second Scottish independence referendum, “A vote for independence would be negative for the UK’s rating, as it would lead to a rise in the ratio of government debt/GDP, increase the size of the UK’s external balance sheet and potentially generate uncertainty in the banking system, for example in the event of uncertainty over Scotland’s currency arrangement.”

The increased uncertainty was a common thread as S&P included it in its rationale, “The downgrade reflects our view that the “leave” result in the U.K.’s referendum on the country’s EU membership (“Brexit”) will weaken the predictability, stability, and effectiveness of policymaking in the UK and affect its economy, GDP growth, and fiscal and external balances. We have revised our view of the U.K.’s institutional assessment and we no longer consider it to be a strength in our assessment of the UK’s key rating factors. The downgrade also reflects what we consider enhanced risks of a marked deterioration of external financing conditions in light of the UK’s extremely elevated level of gross external financing requirements (as a share of current account receipts and usable reserves).” In the end, S&P argues, “We believe that the lack of clarity on these key issues will hurt confidence, investment, GDP growth, and public finances in the UK, and put at risk important external financing sources vital to the financing of the UK’s large current account deficits (in absolute terms, the second-largest globally behind the US).”

About Tyler

Tyler is the chief media reporter for TKNN, with the news organization since its founding in November of 2010. He has previously served as chief political reporter and chief political anchor for TKNN.

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