World Economy

Moody’s: UK Credit Rating May Survive Brexit

Moody’s: UK Credit Rating May Survive BrexitMoody’s: UK Credit Rating May Survive Brexit

Ratings agency Moody’s has said that the UK may be able to avoid a credit downgrade if it leaves the European Union.

The agency’s lead UK analyst said that it was possible that a “Brexit” may lead to “no impact” on the Aa1 rating.

Kathrin Muehlbronner, senior vice president at Moody’s and the agency’s lead UK analyst, said that the UK’s “diversified and rich economy” meant it could flourish outside the bloc.

Her comments set Moody’s against rival Standard & Poor’s, which warned this summer that it would strip the UK of its gold-plated AAA rating even if it simply looked like Britain was on course to leave the EU.

Again in late October, S&P chief sovereign rating officer, Moritz Kraemer, told the news agency Reuters that the sovereign rating could even be snipped by two notches should relations with Brussels deteriorate in the event of an exit.

It also warned on the prospect of such a result triggering new calls for a vote on Scottish independence, give the Scottish National Party government’s fierce opposition to a UK withdrawal from Brussels.

While Moody’s said the uncertainty would be negative for growth, it said this could be short-lived if the UK were able to negotiate new trade deals with major partners quickly.

“Uncertainty alone may not change the rating,” said Muehlbronner. “What we care about is economic strength, and it is our view that the economic impact of a Brexit would be negative.

“The question is: how big would the damage be? Would we just be looking at a short-term moderation of growth where the UK puts in place other policies that mitigate the other downsides?

“In that case, it might well be that there is no impact on the rating. For example, in a scenario where growth falls that doesn’t change some of the fundamentals of the UK–we see it as a very strong, large, diversified and rich economy, with strong institutions.”

 No Pre-Condition

S&P said in June there was now a one in three chance of a downgrade of one or more notches in the event of Brexit, which is due to take place by 2017 at the latest–with recent opinion polls showing growth in support for the Brexit camp.

However, Kraemer said the UK could be upgraded back if the economy maintained its influence. “Switzerland is an AAA and they’ve never been part of the EU, and Norway is, too. There’s no pre-condition of being a part of the EU.”

“We think EU membership is important because we believe that it anchors investor expectations and it gives British banks and companies unfettered access to the largest economic area in the world–so that’s what really matters–they can be a member of the club or not,” he said.

“There’s no pre-condition of being a part of the EU. In fact, within the EU, a lot of the former AAAs are no more.”

The UK now exports more goods to countries outside the EU than to countries within the bloc, according to official data.

Moody’s was the first rating agency to strip the UK of its top rating in 2013, warning that the government’s debt reduction program faced significant “challenges” ahead. Its current outlook on the UK rating is “stable”.

Muehlbronner said the UK would have to get its debt share down before Moody’s would consider reinstating the top rating.

“It’s not as mechanical as: get debt down by 10 percentage points and get an upgrade, but clearly in order to get back to a higher rating, the UK would need to improve on that,” she said.

She also said Moody’s was monitoring UK household debt ratios closely.