A vote to leave the EU in June’s referendum will threaten the UK’s strong credit score, potentially pushing up the cost of government borrowing, the ratings agency Moody’s has warned.
On Monday the pound tumbled on growing fears of a Brexit, hitting a seven-year low against the US dollar and also weakened against other big currencies as investors pulled money out of UK assets. Currency experts said London mayor Boris Johnson coming out for the leave campaign intensified pressure on sterling.
Moody’s, which assigns scores to governments’ creditworthiness, said a new EU deal reached by prime minister David Cameron would help to alleviate some uncertainty around Brexit but that the outcome of the 23 June referendum “remains too close to call”.
In the event of a vote to leave the EU, the economic costs would outweigh the benefits, Moody’s said. Exports would likely suffer, as would investment, and policymakers would get tied up in lengthy renegotiations of the UK’s trade relations.
“We consider it positive that the referendum will take place as soon as June, as a lengthy period of uncertainty on the part of firms and investors would damage the UK’s economic growth prospects. That said, the outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit negative for the UK economy,” said Kathrin Muehlbronner at Moody’s.
Moody’s currently rates the UK Aa1, one notch below the top triple-A score. The agency said that if the public vote to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of a downgrade to the Aa1 rating in the future.
The warning follows comments in December from rival agency Fitch that a vote to leave could hurt the UK’s credit score. Standard & Poor’s, the only big ratings agency still giving Britain the top ranking, has also flagged risks from the referendum to the UK’s financial services sector, its exports, and the wider economy.
Economists have said that even before the referendum outcome is known, the UK’s growth prospects could be hit by the uncertainty. Such fears were reflected on financial markets, where sterling hit a seven-year low of $1.4067, down 2.3% on the day, putting it on track for its biggest one-day fall since early 2009.
Economists at investment bank Citi raised the probability of Brexit from 20-30% to 30-40% after Johnson and the justice secretary, Michael Gove, announced their support for the leave campaign.
“So far, polls still suggest that the UK is more likely to vote to stay in the EU than to leave, and indeed ‘remain’ is still our base case scenario. We expect the campaign between now and June to shift the debate from the nature of the UK’s relationship with the EU to the economic and political risks of Brexit,” Citi economists Tina Fordham and Michael Saunders wrote in a research note.
“Having said that, following the decision of credible and popular leaders like Johnson and Gove to back the out campaign, we now increase the probability that the UK votes for Brexit.”
With the referendum date now confirmed, traders warned that the pound is set for four months of volatile trading. Opinion polls are tight and financial markets are also wary of reading too much into a slim lead for the remain campaign after misleading signals from such polls in the run-up to last year’s UK general election.
“Markets are likely to become increasingly nervous on the issue, and lack confidence in polling data following the margin of failure to predict the UK general election 2015 outcome by a wide margin,” said Fordham and Saunders.
- Bill O’Neill, head of the UK investment office at UBS Wealth Management, also warned of choppy markets ahead.
- “We expect UK markets to be volatile over coming days as the campaigns step up a gear and investors adjust to the prospect of a referendum four months from now, but our base case remains that the UK population will decide to remain in the EU,” he said.
- “Our Brexit probability remains at 30% as we monitor the public response to the agreement with other EU members.”
- The chairman of Britain’s biggest bank, HSBC, also highlighted a “heightened risk of uncertainty” from a vote to leave the EU. Speaking as the bank reported a small rise in 2015 profits on Monday, Douglas Flint commented: “Every business in the UK would be reviewing its supply chain, legal agreements and its licences.” He said the UK had a disproportionately large number of companies headquartered here and “that period of uncertainty would be very damaging”.
- The bank has already said that the referendum or any vote to leave would not make it revisit its decision to remain headquartered in London, where it has been based since 1992. Chief executive Stuart Gulliver said that the broad impact on the UK would come from the fact that the EU is the country’s largest trading partner. But Gulliver said he did not expect London’s predominance as a foreign exchange trading market to be damaged.
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