Moody's warns election result will complicate Brexit talks

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The inconclusive outcome of Britain’s snap election will complicate and probably delay Brexit negotiations that were due to start next week, a leading credit rating agency has warned.

Moody’s, one of the big financial bodies that assigns credit scores to governments, said Theresa May’s failure to secure an outright majority would also hurt the UK’s standing on international debt markets because it was likely to result in more public borrowing.

As the pound fell for the second consecutive session on Monday, a senior economist at another ratings agency, Standard & Poor’s, warned that already faltering UK economic growth would be weakened further by the latest bout of political instability.

“In terms of the outlook for growth, it’s clear that things are not going in the right direction,” S&P European chief economist Jean-Michel Six told the AJEF association of financial journalists in Paris.

“This latest bit of instability can only weaken the business environment and consumer confidence,” Six said, according to Reuters.

He also played down a view in the markets that the Conservatives’ reduced standing would lead to a soft Brexit deal. “On the contrary, I think it’s possible to imagine a scenario, likely but not certain, in which Mrs May seeks to push for a very hard line towards the EU to show to her own party that she’s holding the course,” said Six.

Moody’s, by contrast, said the UK could well end up with a soft Brexit deal on the back of last week’s election result, which saw Labour significantly increase its number of seats in parliament. But the ratings agency also warned of a delay to Brexit talks due to start on 19 June or “at least a period in which no substantive issues are discussed”.

That would mean the UK loses precious negotiating time as the clock ticks towards an exit date set for March 2019 – two years on from May triggering article 50.

“The UK government will … be under significant time pressure in these negotiations. Given the tight deadline, it will be imperative in our view for the government to secure an agreement for a transition period,” said Kathrin Muehlbronner, senior vice president at Moody’s investors service.

She added that the election outcome would be widely interpreted as indicating a pronounced shift away from May’s “hard Brexit” objectives, focused on exit from the single market and EU customs union, tightening of immigration rules for EU nationals and a rejection of the jurisdiction of the European court of justice.

“While it is unclear at this stage which changes to its strategy the government will contemplate, it may be that ‘softer’ versions of Brexit will now be considered,” added Muehlbronner.

Moody’s stripped the UK of its coveted triple A status in 2013 to put it one notch below at Aa1. The rating agency downgraded the outlook on the rating to negative from stable on 24 June last year, the day after the EU referendum.

In Monday’s update, it said recent political developments were “credit negative” given that the government was likely to put plans to cut the deficit on hold.

Economic indicators in the months following the referendum suggested businesses and consumers had shrugged off the result and the UK economy was one of the best performers among its peers in 2016. But it has slowed sharply this year and there are signs companies are growing more worried about imminent Brexit talks between a weakened UK government and the rest of the EU.

The manufacturers’ organisation EEF will issue a plea on Tuesday for the government to rethink its Brexit strategy and put access to the single market and a form of customs union, along with a suitable transition period, at the heart of its negotiating strategy.

“The new government’s priorities must radically refocus Brexit negotiations around trade and close cooperation, ensuring a smooth exit from the EU,” said EEF’s chief executive, Terry Scuoler.

“There are numerous ways of establishing a new relationship with the EU and, given we’ve just wasted a year, the government needs to move away from its previous rhetoric and start repairing relations with EU partners.”

Powered by Guardian.co.ukThis article was written by Katie Allen, for The Guardian on Tuesday 13th June 2017 00.01 Europe/London

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