That didn’t take too long: just as the rating agencies warned as part of the scaremongering campaing, the downgrades have begun.
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From S&P
Ratings On The United Kingdom Lowered To ‘AA’ On Brexit Vote; Outlook Remains Negative On Continued Uncertainty
OVERVIEW
- In the nationwide referendum on the U.K.’s membership of the European Union (EU), the majority of the electorate voted to leave the EU. In our opinion, this outcome is a seminal event, and will lead to a less predictable, stable, and effective policy framework in the U.K. We have reassessed our view of the U.K.’s institutional assessment and now no longer consider it a strength in our assessment of the rating.
- The downgrade also reflects the risks of a marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements.
- The vote for “remain” in Scotland and Northern Ireland also creates wider constitutional issues for the country as a whole.
- Consequently, we are lowering our long-term sovereign credit ratings on
- the U.K. by two notches to ‘AA’ from ‘AAA’.
- The negative outlook reflects the risk to economic prospects, fiscal and external performance, and the role of sterling as a reserve currency, as well as risks to the constitutional and economic integrity of the U.K. if there is another referendum on Scottish independence.
RATING ACTION
On June 27, 2016, S&P Global Ratings lowered its unsolicited long-term foreign and local currency sovereign credit ratings on the United Kingdom to ‘AA’ from ‘AAA’. The outlook on the long-term rating is negative. We affirmed the unsolicited short-term foreign and local currency sovereign credit ratings on the U.K. at ‘A-1+’.
We also lowered to ‘AA’ from ‘AAA’ our long-term issuer credit rating on the Bank of England (BoE) and the ratings on the debt programs of Network Rail Infrastructure Finance PLC. We affirmed the short-term ratings on the BoE and Network Rail Infrastructure Finance debt programs at ‘A-1+’. The outlook on the long-term rating on the BoE is negative.
As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on the United Kingdom, are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, includingpublication in accordance with a pre-established calendar (see “Calendar Of 2016 EMEA Sovereign, Regional, And Local GovernmentRating Publication Dates,” published Dec. 22, 2015, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasonsfor the deviation. In this case, the reason for the deviation is the U.K.’s referendum vote to leave the EU. The next scheduled rating publication on United Kingdom will be on Oct. 28, 2016.
RATIONALE
The downgrade reflects our view that the “leave” result in the U.K.’s referendum on the country’s EU membership (“Brexit”) will weaken the predictability, stability, and effectiveness of policymaking in the U.K. and affect its economy, GDP growth, and fiscal and external balances. We have revised our view of the U.K.’s institutional assessment and we no longer consider it to be a strength in our assessment of the U.K.’s key rating factors. The downgrade also reflects what we consider enhanced risks of a marked deterioration of external financing conditions in light of the U.K.’s extremely elevated level of gross external financing requirements (as a share of current account receipts and usable reserves). The Brexit result could lead to a deterioration of the U.K.’s economic performance, including its large financial services sector, which is a major contributor to employment and public receipts. The result could also trigger a constitutional crisis if it leads to a second referendum on Scottish independence from the U.K.
We believe that the lack of clarity on these key issues will hurt confidence, investment, GDP growth, and public finances in the U.K., and put at risk important external financing sources vital to the financing of the U.K.’s large current account deficits (in absolute terms, the second-largest globally behind the U.S.). This includes the wholesale financing of the U.K.’s commercial banks, about half of which is denominated in foreign currency.
Brexit could also, over time, diminish sterling’s role as a global reserve currency. Uncertainty surrounding possibly long-lasting negotiations around what form the U.K.’s new relationship with the EU will look like will also pose risks, possibly leading to delays on capital expenditure in an economy that already stands out for its low investment/GDP ratio.
Detailed negotiations are set to begin, with a great deal of uncertainty around what shape the U.K.’s exit will take and when Article 50 of the Lisbon Treaty will be triggered. While two years may suffice to negotiate a departure from the EU, it could in our view take much longer to negotiate a successor treaty that will have to be approved by all 27 national parliaments and the European parliament and could face referendums in one or more member states. While some believe the U.K. government can arrive at a beneficial arrangement with the EU, others take the view that the remaining EU members will have no incentive to accommodate the U.K. so as to deter other potential departures and contain the rise of their own national eurosceptic movements.
In particular, it is not clear if the EU–the destination of 44% of the U.K.’s exports–will permit the U.K. access to the EU’s common market on existing (tariff-free) terms, or impose tariffs on U.K. products. Future arrangements regarding the export of services, including by the U.K.’s important financial services industry, are even more uncertain, in our view. Given that high immigration was a major motivating issue for Brexit voters, it is also uncertain whether the U.K. would agree to a trade deal that requires the country to accept the free movement of labor from the EU. The negotiation process is therefore fraught with potential challenges and vetoes, making the outcome unpredictable.
We take the view that the deep divisions both within the ruling Conservative Party and society as a whole over the European question may not heal quickly and may hamper government stability and complicate policymaking on economic and other matters. In addition, we believe that Brexit makes it likely that the Scottish National Party will demand another referendum on Scottish independence as the Scottish population was overwhelmingly in favor of remaining within the EU. This would have consequences for the constitutional and economic integrity of the U.K. There may be also be similar constitutional issues around Northern Ireland.
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