Britain’s biggest companies could face a credit downgrade – potentially forcing up their borrowing costs – should the UK vote to leave the EU in June, according to a report by a leading ratings agency.
Moody’s said the prospect of lengthy and uncertain negotiations would deter foreign investors and limit the profits of mainstream corporations that trade with the rest of the EU. But banking and insurance would be less affected than non-financial companies.
The warning came as the Oxford Economics thinktank said Britain could quit the trade bloc largely unscathed only if it “cut a good trade deal with the EU, adopted a raft of tax cuts and deregulation measures, and continued to allow a high level of immigration from the EU”.
And a report by the CBI said the savings from reduced EU budget contributions and regulation were greatly outweighed by the negative impact on trade and investment. The business lobby group said by 2020, the overall cost to the economy could be up to £100bn and 950,000 jobs.
If, as Moody’s suggests, companies would have their ratings downgraded after Brexit, it could increase the borrowing costs of British business and limit their investment in new projects. While many companies have enough cash to fund investment, shareholders are likely to be concerned about backing investments that will carry higher loan repayments.
Moody’s previously warned that it may be forced to downgrade the government’s credit rating after analysis showed growth was likely to slow after a no vote, hitting tax receipts.
In the latest reportit scrutinised four main areas of economic activity – trade, migration, investment and regulation – to judge the impact on British business. It found that while the banking sector would be largely unaffected in the short term, the additional trade barriers, possible downturn in foreign investment, regulatory changes and curbs to migration would hurt other firms selling goods and non-financial services in the EU.
It said: “For non-financial corporate issuers in the UK, Brexit would be credit negative, reflecting the weakened macroeconomic outlook. While Moody’s believes the UK and the EU would preserve most of their existing trading relationships, any substantial new barriers to trade would pose a more significant threat to corporate creditworthiness. Infrastructure companies could face uncertainty around new regulatory regimes.”
The impact of a British withdrawal on the EU also features in the report, echoing the concerns of many in Brussels that Brexit will trigger political and economic turmoil in what remains of the trade bloc.
The German finance minister suggested on a recent visit to Britain that the EU would suffer should the UK leave, hitting British exports to the EU and slowing growth even further. Wolfgang Schäuble also said it was unlikely the UK would secure a free trade agreement that matched the single market, adding that “there would be a cost” to British business for leaving the EU.
Moody’s said: “The general uncertainty following a Brexit vote would likely hit confidence across the EU and could weigh on economic growth. Brexit would also be credit negative for the EU as it could increase the risk of further exits from the bloc and heighten support for independence movements elsewhere.”
Oxford Economics played down the impact on the EU, saying the the union “had nothing to fear” in the longer term from the exit of the UK – which would suffer slower growth and weaker public finances.
It said that while the UK stood to benefit from the elimination of EU budget contributions, this was likely to be a false economy. “In any scenario involving a significant clampdown on immigration, the overall fiscal position deteriorates markedly by 2030. This would require further annual tax rises or spending cuts equivalent to between £22bn and £31bn today, a fiscal hole that could be closed by raising VAT by between 4% and 6%,” it said.
“The only way to avoid a deterioration in economic fortunes would mean entering a trade settlement involving continued contributions to the EU budget, like Norway and Switzerland, or the UK having limited access to the single market.”
Henry Worthington, an analyst at Oxford Economics, said: “The long-term impact of Brexit on the UK need not be severe. But benign scenarios involve retaining some of the least popular aspects of EU membership: continued high levels of immigration, restrictions on our ability to make trade deals with non-EU countries, and continuing to pay money to Brussels.”
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