Britain leaving EU would affect credit rating, says Moody's

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A vote to leave the EU could cut the UK’s credit rating, according to the ratings agency Moody’s, which has waded into the debate with a warning about rushing the referendum.

The agency, which rates UK government debt one notch below the top triple-A score, says holding a referendum on EU membership next year would cut the period of uncertainty but at the same time would allow less time to negotiate reforms with Brussels.

That in turn would raise the chance of a vote to leave the EU, a so-called Brexit, with possible consequences for the UK’s rating.

In Moody’s view, a shorter time frame increases the risk that the UK government will not manage to secure the changes that it is seeking, which in turn may negatively influence the government’s willingness to support remaining in the EU,” the agency says in an update on the UK.

While the outcome of the referendum remains uncertain, Moody’s believes that a withdrawal from the EU would have negative implications for the UK’s growth prospects and – in the absence of an alternative trade arrangement with the EU that at least partly replicates the current access to the EU’s single market – would likely put pressure on the UK’s sovereign rating.

David Cameron had vowed to hold an in/out referendum by 2017 but there has been talk of moving the vote forward to 2016, to avoid a politically dangerous clash with the French and German elections in 2017. Moody’s says that would cut the time available for the UK government to lobby for repatriation of powers.

Moody’s also warns, in its update, that George Osborne’s planned cuts appear overly ambitious and he is likely to miss his target to balance the public finances by the end of this parliament.

The agency forecasts economic growth will remain “solid” this year and next but says that its “high debt burden remains a key weakness”. While welcoming government pledges on raising productivity and cutting the deficit it is sceptical about how much can be achieved in the short-term.

Moody’s believes that the government will indeed manage to reduce the budget deficit substantially over the coming years, given its commitment as well as robust GDP growth and a continuing low interest-rate and inflation environment,” says the report, by senior credit officer Kathrin Muehlbronner.

At the same time, the rating agency believes that achieving the spending cuts targeted by the government might be difficult to achieve in full, and the agency therefore expects a more moderate reduction in the budget deficit, to just above 1% of GDP by the end of this parliament.

The agency’s support for austerity measures puts it at odds with those who have warned more severe cuts in the near-term could dent the UK’s economic recovery.

The Paris-based OECD thinktank used its latest outlook for big economies last week to warn that Osborne should spread the pain of tough public spending cuts beyond the next two years. Osborne’s most recent budget pointed to two years of sharp cuts, followed by a freeze in 2018-19 and a rise in 2019-20. But the OECD said delaying some of the cuts planned for the financial years 2015-16 and 2016-17 would lower the impact on growth.

A separate report by International Monetary Fund economists added fuel to the austerity debate by raising the idea that some countries that had racked up debts in the aftermath of the banking crash, but presided over sound economies, should just live with their debts, rather than run surplus budgets to bring them down.

But the business group CBI used its latest economic outlook for the UK to call on the government to keep up its austerity drive, given businesses still ranked deficit reduction as a top priority. At the same time it cut its growth forecasts for the UK after official figures showed a slow start to this year.

Moody’s forecasts for UK growth this year were more optimistic. It says GDP will grow by 2.7% and 2.4% in 2015 and 2016 respectively. That compares with the CBI’s forecasts for 2.4% this year and 2.5% in 2016. The OECD also says growth will be 2.4% this year but will then slow to 2.3% next year.

Moody’s echoed other forecasters in warning the UK economy remains overreliant on demand from consumers despite a government push to boost manufacturing and exports. Muehlbronner said:

The UK’s economic growth pattern remains relatively unbalanced and mainly driven by domestic demand and the services sector, while exports and manufacturing remain subdued.

She also highlighted a “continuing high level of household debt, which makes households and the banking sector vulnerable to a house price shock or rapid increases in interest rates”, adding:

Longer-term growth challenges for the UK economy might arise if the weak productivity performance of the past several years persists.

Powered by article was written by Katie Allen, for on Monday 8th June 2015 12.00 Europe/London © Guardian News and Media Limited 2010


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