Moody's says UK credit rating under increased pressure over fears of "abrupt and damaging exit" from EU

 
Catherine Neilan
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The UK's creditworthiness is coming under renewed pressure amid increasingly uncertain Brexit negotiations, as well as rising political and fiscal risks.

Moody's has said the UK could lose its Aa1-negative rating if the government is unable to "preserve core elements of the UK's current access to the EU single market".

The ratings agency said it believed the likelihood of an "abrupt and damaging exit with no agreement and reversion to World Trade Organisation (WTO) trading rules" had increased since the period directly after the referendum, exacerbated by the government's move to pursue "objectives implying a 'hard brexit'."

The pound dropped this morning, on the back of this report and Bank of England's Ben Broadbent saying he was "not ready" to raise interest rates yet.

Kathrin Muehlbronner, a Moody's senior vice president and the report's author said the risks had increased since Theresa May's dismal performance in the general election, although the "base case scenario" was that the UK and the EU would manage to agree on a free trade arrangement "as this remains in the interests of both sides".

"In order to secure a working majority in parliament, the UK government dropped several campaign pledges that would have reduced spending pressures in important areas and it is under significant pressure now to raise spending," the report noted. "Weaker public finances will likely lead to a further delay in reversing the rising public debt trend. In addition, the UK's institutional capacity will be tested, given the complexity and quantity of economic policy decisions in the coming years."

Moody's expects the UK economy to weaken "significantly" over the rest of the year, predicting growth declining to 1.5 per cent this year and one per cent in 2018, compared with 1.8 per cent in 2016.

"Over the medium term, growth prospects would likely be materially weaker if the UK were to fail to reach a new trade arrangement with the EU that allows it good access to the single market," the report said.

Continuously higher budget deficits than expected and further delays in reversing the rising public debt trend would also be negative for the rating, Moody's added. Any downgrade could have longer term implications if the role of sterling as a reserve currency were "significantly diminished or lost".

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