Wednesday 25 May 2016 4:13 pm

Sterling could lose its reserve currency status after Brexit

Sterling could lose its reserve currency status if the UK votes to leave the European Union, ratings agency Standard and Poor’s (S&P) has said today, in the latest warning about a currency crisis after Brexit.

Analysts said that governments would turn away from the pound as a store of value if Britain votes to break away from the EU, as the terms of trade come under pressure, sterling depreciates and the current account deficit widens.

S&P stated: “A decision by Britain in favour of leaving the EU could jeopardise the British pound’s position as a reserve currency and the associated benefits to the credit rating.”

Ratings agencies have warned that the UK’s gold standard triple-A credit rating would come under pressure in the event of Brexit. A lower credit rating would mean higher borrowing costs for the UK government and some companies.

Read more: The pound's looking sound as it gains ground

The pound is currently the world’s third most popular reserve currency, with just shy of five per cent of global reserves – after the US dollar with 64 per cent and the euro on 20 per cent. Reserve currency status knocks around 0.25 percentange points off both private and public sector borrowing costs according to S&P.

At the end of last year the value of sterling in official reserves hit a seven-year high, allaying fears that the pound would inevitably fall out of favour among central banks and national governments as the UK’s contribution to the world economy drops. The proportion of official sterling reserves has grown from three to five per cent since 2004.

The current account deficit – which came in at 5.2 per cent of GDP in 2015 – would have been 6.2 per cent if sterling was not a reserve currency, S&P said, warning that Brexit “could strike a blow” to the status of the pound.