S&P cuts UK outlook amid EU referendum warning

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David Cameron’s decision to hold a referendum on EU membership has put Britain at greater risk of losing its triple-A credit score, according to Standard & Poor’s, the only big ratings agency to still give Britain the top ranking.

Cutting its outlook for UK government debt to “negative” from “stable”, the agency highlighted serious risks to the pound and Britain’s ability to attract foreign investment were it to break away from the EU. There was also a danger that in the runup to the vote domestic party politics and negotiations with Brussels would divert attention away from the UK’s pressing economic problems.

S&P joined other forecasters in warning about the potential damage to the UK economy from holding a referendum. It also considered the implications of a vote to leave, warning so-called “Brexit” would raise questions for the country’s public finances as it may struggle to finance its funding gaps.

“The decision of the newly elected Conservative majority government to hold a referendum on the UK’s EU membership by 2017 represents a risk to growth prospects for the UK’s financial services and export sectors, as well as the wider economy,” S&P wrote in a note explaining its outlook change.

Its move follows remarks earlier in the week from rival credit ratings agency Moody’s that warned against rushing the referendum and said that a vote to leave could cut the UK’s rating. Moody’s, which rates UK government debt one notch below the top triple-A score, says holding a referendum next year would cut the period of uncertainty but at the same time allow less time to negotiate reforms with Brussels.

S&P’s concerns centred largely on the political landscape since May’s election victory for the Conservatives. It put the decision to pledge an in-out referendum by 2017 down to a desire to contain Ukip’s influence and to strengthen unity inside the Conservative party, “which has a strong eurosceptic wing”.

“Economic policymaking could be at risk of being more exposed to party politics than we had previously anticipated,” S&P commented.

“While Ukip gained only a single seat, it ended second in 120 of the 650 national constituencies, overwhelmingly in England. In our opinion, the outcome of the general election could make consensus-based policymaking more challenging.”

The ratings agency also had serious concerns about Scotland’s position, should the UK vote to leave the EU. In the meantime, energy was being diverted from addressing more pressing problems such as dealing with a lack of major infrastructure projects and a housing shortage.

“Our understanding is that, as the newly elected UK government enters into negotiations with its EU partners for potential treaty change, the aim is to agree at the same time upon a constitutional settlement devolving wide-ranging powers to Scotland. We find these objectives ambitious and may well take precedence over other policy imperatives, such as how to address the supply bottlenecks in UK infrastructure and in the housing market,” said the S&P note.

The agency also warned that breaking away from the EU could lead to difficulties in raising money from foreign investors as well as having negative implications for the pound.

“The UK benefits from its flexible open economy, which we judge to have prospered inside the EU. We believe the UK’s EU membership has enabled the economy to attract higher inflows of low-cost capital and skilled labour than it would have attracted without access to the single market,” S&P said.

The agency is the last of the big three to keep a top triple-A rating on UK government debt. The Fitch credit ratings agency and Moody’s both cut the UK to a notch below AAA in 2013. The “negative” outlook from S&P indicates it sees at least a one-in-three chance that the UK will lose its AAA rating over the next two years.

A Treasury spokesman said: “Today’s confirmation of the UK’s AAA rating by Standard and Poor’s is a clear endorsement of the resilient recovery that the government’s long-term plan is delivering.

“We are the first to say that this is a time of heightened risk that threatens the recovery, which is why we need to go on working through the plan that is delivering economic security.

“Central to that plan is giving the British people their first say on our EU membership in 40 years and resolving the uncertainty around Britain’s relationship with the EU. In doing this, we are seeking economic reforms that will deliver long-term prosperity for the working people of Britain and the rest of Europe.”

Fitch held its rating for the UK at “AA+” with a “stable” outlook on Friday night. The ratings agency said in an update on the UK that it was too early to make a judgment on the credit rating impact of Brexit, but that there were concerns for economic growth.

“Negotiating the shape of a UK exit would be lengthy and complicated and multiple different outcomes are possible. This prolonged uncertainty could itself dent UK economic growth by weighing on confidence and investment,” Fitch said in its update.

Powered by Guardian.co.ukThis article was written by Katie Allen, for The Guardian on Friday 12th June 2015 19.05 Europe/London

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