LONDON — Ratings agency Standard & Poor’s has warned that the European Union’s credit rating could be at risk of downgrades if the United Kingdom refuses to pay a Brexit divorce bill of up to €60 billion.
“The European Union ratings could come under pressure in an adverse scenario,” an S&P report cited by the Daily Telegraph says.
“This is because our ratings on the EU are to a certain extent predicated on our expectation that the UK would honour its share of financial obligations to the EU,” it continues.
Britain’s payment, or lack thereof, of the so-called “divorce bill” has so far proved to be one of the biggest sticking points surrounding Brexit. Not only do EU officials want Britain to hand over much more than Britain would like to, the bloc’s key negotiators are insisting that a settlement is reached before any other section of Brexit talks can begin.
Standard and Poor’s warning is likely to make the EU even more steadfast in this area.
As it stands, Britain is expected to be hit with a bill of roughly £51 billion, which will effectively be a means of settling all its outstanding liabilities with the European Union.
The British government has said that it will pay a settlement to the 27-nation bloc, but believes the amount demanded by the EU is too high. In March, leaked documents obtained by Dutch magazine De Volkskrant suggested that the EU would consider taking the UK to court if the two sides don’t agree on the bill.
The EU’s chief Brexit negotiator Michel Barnier will tell British government to hand over the cash once talks formally begin, but is said to be expecting talks about the bill to take up as much as a quarter of the Article 50 period.
“He thinks we will be discussing money and acquired rights [of expatriate citizens] until December,” a “senior eurozone official” who is in contact with Barnier told the Financial Times in late February.
“No trade, nothing about the future, just the past.”
Currently, the EU has an AA credit rating, the second highest awarded by S&P. It previously sat in the highest AAA tranche, but was downgraded soon after Britain voted to leave the EU.
“After the decision by the UK electorate to leave the EU,” S&P said at the end of June 2016, “we have reassessed our opinion of cohesion within the EU, which we now consider to be a neutral rather than positive rating factor.”
A ratings downgrade would not merely be a symbolic gesture from S&P, but would also materially impact the EU’s ability to access financing. The lower a country’s credit rating is, the higher rates it must generally pay when accessing debt in the markets.
It can also become more difficult to find entities willing to provide funding, although even if the EU were to be downgraded to an A rating, it would still be considered to have a “strong” ability and commitment to repay its debts.
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