The UK has been stripped of its last AAA rating as credit agency Standard & Poor’s warned of the economic, fiscal and constitutional risks the country now faces as a result of the EU referendum result.
The two-notch downgrade came with a warning that S&P could slash its rating again. It described the result of the vote as “a seminal event” which would “lead to a less predictable stable and effective policy framework in the UK”. The agency added that the vote to remain in Scotland and Northern Ireland “creates wider constitutional issues for the country as a whole”.
S&P was the last of the big three ratings agencies to have a blue-chip rating on the UK’s credit-worthiness. Moody’s which stripped the UK of its top notch rating amid the austerity cuts of 2013, said last week it might further cut its view of the UK.
Rating agency moves have the potential to make it more expensive for the government to borrow.
The S&P move came after another torrid day on the financial markets. The pound hit fresh 31-year lows and £40bn was wiped off the value of the UK’s biggest companies on Monday despite efforts by George Osborne to quell investors’ concerns about the economic and political ramifications of the Brexit vote.
After three days of silence in the wake of the referendum the chancellor made a statement yesterday morning in a bid to calm the markets. However, sterling remained under sustained pressure on the foreign exchange markets as economists slashed their forecasts for UK economic growth. Wall Street was also weaker while continental bourses sold off sharply after Friday’s record $2tn of losses on global stock markets.
Expectations are now mounting that the Bank of England will cut interest rates - possibly to zero from their historic low 0.5% - to stimulate the economy, and yields on government bonds fell below 1% for the first time, which could spell cheaper mortgage rates.
In a live broadcast just after 7am, as dealers in London braced for another day of turmoil, Osborne insisted: “our economy is about as strong as it could be to confront the challenge our country now faces”.
But moderate losses on the FTSE 100quickly deepened and at one point sterling was down 3.5% against the dollar, at $1.3122, its lowest level since 1985. Against the euro, the pound was down 2.4% at €1.19.
Speaking at the World Economic Forum in China, Nouriel Roubini, economist at New York University, described Brexit as “a major significant financial shock” which would create “a whole bunch of economic, financial, political and also geopolitical uncertainties”.
By the end of trading, the FTSE 100 index was down 2.6% - or 156.5 points - and below 6,000. The FTSE 250 - the next tier of companies and more closely tied to the UK economy - was down 7%, coming on top of a 7% fall on Friday.
“It’s been another dramatic day of trading on the UK stock market,” said Laith Khalaf, senior analyst at financial firm Hargreaves Lansdown.
Companies likely to be hit by a Brexit-induced recession were hit hard. In two days, some £40bn has been wiped off the value of banking stocks and £8bn off house builders. At one point, shares in the bailed-out Royal Bank of Scotland plunged 25% while housebuilders such as Persimmon and Taylor Wimpey have lost more than 40% in just two trading days.
Michael Hewson, chief market analyst at CMC Markets, said that while Osborne’s statement had been measured his comments “were unable to prevent the feeling that UK politics remains in a state of paralysis, with no clear contingencies in place to deal with the fallout of a leave vote.”
The biggest faller in the FTSE 100 was budget airline Easyjet which plunged by 22% after warning that wary consumers would now rethink their travel plans. Exchange rate movements, the carrier added, would add £25m to costs.
Another profit warning came from London-focused estate agent Foxtons. Its shares dived 25% after the firm said Brexit would hit sales for the rest of the year. Shares in so-called challenger banks such as Virgin Money were also pummelled.
Osborne spoke after it emerged that Bank of England governor Mark Carney had cancelled a trip to Portugal to remain in the UK to oversee any response from Threadneedle Street.
The Bank’s financial policy committee, set up in the wake of the financial crisis to look for threats to financial stability, will meet on Tuesday, when the Bank will again offer emergency loans to the banks as part of its Brexit planning.
The fall-out from the Brexit vote is being felt around the world. Italy’s main index fell 4%, extending Friday’s record losses of 12.5%. In Germany and France there were losses of 3%. At the time of the London close, on Wall Street the main share indices were all down more than 1%.
The Chancellor may have taken some comfort from the fall in yields on ten year government bonds. Yields on these gilts, which move inversely to prices, fell below 1% for the first time. This fall in gilt yields will keep government borrowing costs down and lead to lower mortgage rates. However, they also mean pension companies have started cutting the amount paid to the newly retired.
Osborne refused to repeat his pre-vote warning of a Brexit recession, saying only that the economy would now face “adjustments”. But analysts started to cut their forecasts for UK growth. Goldman Sachs, is now forecasting just 0.2% growth in 2017 - down from 2% predicted previously.
The consultancy Oxford Economics said interest rates could be slashed to 0% within weeks . Morgan Stanley analysts said European and UK stocks would fall up to 10% over the coming months and sterling would fall to between $1.25 and $1.30.
Much of the market’s focus has been on the pound, particularly after the speculator George Soros, who made $1bn when sterling fell out of the exchange rate mechanism in 1992, had warned of a “black Friday” in the event of Brexit. His spokesman stressed that he had not bet against the pound last week.
“George Soros did not speculate against sterling while he was arguing for Britain to remain in the European Union,” the spokesman told Reuters. “However, because of his generally bearish outlook on world markets, Mr Soros did profit from other investments
This article was written by Jill Treanor and Katie Allen, for theguardian.com on Monday 27th June 2016 19.24 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010