Ratings agency Moody’s says Britain at risk of credit downgrade

Britain’s finance ministry and central bank had warned voters the country would face a major economic hit if it left the EU.

A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum. REUTERS/Reinhard Krause

Ratings agency Moody’s said Britain's creditworthiness was now at greater risk after voting to leave the European Union, as the country would face substantial challenges to successfully negotiate its exit from the bloc.

Moody’s assigned a negative outlook to its ‘Aa1’ rating for British government debt after a Thursday referendum showed that a clear majority of Britons wanted to leave the EU, prompting Prime Minister David Cameron to announce he would resign. “During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody’s expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth,” the agency said.

Economic hit

Britain’s finance ministry and central bank had warned voters the country would face a major economic hit if it left the EU after more than 40 years as a member, and sterling on Friday fell to its lowest against the dollar since 1985.

Rival credit ratings agency Standard & Poor’s - the only major one to still assign Britain a top-notch triple-A grade - said before Thursday’s referendum that Britain was likely to face a downgrade if it voted to leave, and Fitch Ratings said on Friday that the vote would be “moderately negative”.

But Moody’s was the first to take concrete action after the vote, just as it was in 2013 when it was the first to strip Britain of its ‘AAA’ credit rating due to slow growth and rising public indebtedness.

Questions over Brexit

The decision to leave the EU raised questions over Britain’'s hitherto high-quality economic policymaking, Moody’s said.

“Policy predictability and effectiveness of economic policymaking ... might be somewhat diminished,” Moody's said.

Challenges “The challenges for policymakers and officials will be substantial.”

Protracted trade talks, slow growth or heightened pressures on sterling could all trigger a downgrade, Moody’s said.

Supporters of Britain leaving the EU have largely dismissed warnings about the economic consequences as scaremongering.