LONDON — The UK is at risk of a sovereign credit rating downgrade if the government fails to strike a post-Brexit trade deal with the European Union, Moody’s said on Wednesday.
Moody’s, which is one of the world’s big three credit rating companies, said the UK could lose its Aa1 rating if “core elements of the UK’s current access to the EU single market” are lost through Brexit.
Britain’s sovereign debt would be seen as riskier, potentially increasing the Treasury’s borrowing costs, in the event of a rating downgrade.
“The likelihood of an abrupt and damaging exit with no agreement has increased since the referendum,” Moody’s said in an update on the UK’s credit outlook. “The economy has started to slow, and growth prospects could be materially weaker if the UK fails to reach a free trade arrangement with good access to the single market.”
Political uncertainty, made worse by last month’s election returning of a hung parliament, will make it harder for Chancellor Philip Hammond to protect the public purse, Moody’s said, further increasing the risk of a downgrade.
“Political and fiscal risks have increased following the government’s loss of its parliamentary majority in early elections in June, and the government is under significant pressure to raise spending,” Moody’s said. “Continuously higher budget deficits than expected and further delays in reversing the rising public debt trend would also be negative for the rating.”
Kathrin Muehlbronner, the UK analyst for Moody’s, says: “While the negotiations with the EU have recently started, it remains unclear whether the UK government can eventually deliver a reasonably good outcome for the UK.
“The likelihood of an abrupt — and damaging — – exit with no agreement and reversion to WTO trading rules has increased compared to our expectation directly after the referendum, with the government so far pursuing objectives that imply a ‘hard’ exit.”
“In Moody’s base case scenario though, the UK and the EU will manage to agree on a free trade arrangement as this remains in the interests of both sides,” said Muehlbronner.
The report chimes with comments made by Ben Broadbent, the Bank of England’s deputy governor for monetary policy, who sounded the alarm on the economic risks posed by Brexit in a speech on Tuesday.
“Put simply, a significant curtailment of trade with Europe would force the UK to shift away from producing the things it’s been relatively good at, and therefore tends to export to the EU, and towards the things it currently imports and is relatively less good at.”
Speaking on a regional visit to the Scottish city of Aberdeen, Broadbent argued that should Brexit lead to a “significant curtailment” of Britain and the EU’s trading relationship, both parties would see significant damage.
This chart highlights Britain’s strongest industries:
Moving away from things like financial services, insurance, and other services focused exports, and towards the things we are “relatively less good at” like raw materials and food would have direct impacts on the general economic welfare of the average Brit and the economy as a whole, he said.