Moody’s Warns Brexit Would Impact UK Credit Rating

A vote to leave the EU in June’s referendum will threaten the UK’s strong credit score, potentially pushing up the cost of government borrowing, the ratings agency Moody’s has warned.

On Monday the pound tumbled on growing fears of a Brexit, hitting a seven-year low against the US dollar and also weakened against other big currencies as investors pulled money out of UK assets. Currency experts said London mayor Boris Johnson coming out for the leave campaign intensified pressure on sterling.

Moody’s, which assigns scores to governments’ creditworthiness, said a new EU deal reached by prime minister David Cameron would help to alleviate some uncertainty around Brexit but that the outcome of the 23 June referendum “remains too close to call”.

In the event of a vote to leave the EU, the economic costs would outweigh the benefits, Moody’s said. Exports would likely suffer, as would investment, and policymakers would get tied up in lengthy renegotiations of the UK’s trade relations.

“We consider it positive that the referendum will take place as soon as June, as a lengthy period of uncertainty on the part of firms and investors would damage the UK’s economic growth prospects. That said, the outcome of the referendum remains wide open. In our view, a decision to leave the EU would be credit negative for the UK economy,” said Kathrin Muehlbronner at Moody’s.

Moody’s currently rates the UK Aa1, one notch below the top triple-A score. The agency said that if the public vote to leave the EU, it would consider assigning a “negative outlook” to that rating, compared with a “stable” outlook now. Such an outlook would imply a greater chance of a downgrade to the Aa1 rating in the future.

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza