The threat of Brexit – Britain exiting from the EU – could hit the top credit rating of the UK, say two leading credit agencies, Standard & Poor’s and Fitch. Prime Minister David Cameron promised an in-or-out EU referendum before the end of 2017.
Standard & Poor’s is the only leading credit agency that still gives the UK an AAA rating.
Shortly after Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) warned of the risks for the British economy related to a possible Brexit, Standard & Poor’s said it was maintaining its outlook for the UK’s top-notch rating at negative, while Fitch confirmed a rating that was one notch weaker.
The European Union allows British businesses to sell their goods and services to eight times the number of customers the UK’s domestic economy has. (Image adapted from the CBI’s ‘Choosing Our Future’.)
Standard & Poor’s repeated its warning, first issued in June 2015, that Britain faced a 33% chance of a downgrade during the next two years.
If Britons voted to leave the EU, Fitch believes it would have a moderately negative effect on the country’s economic prospects, with Scotland more likely to want to leave the United Kingdom.
Immigration helps British economic growth
Standard & Poor’s said immigration has been generally good for the UK economy over the past ten years, contradicting many anti-EU campaigners who argue that immigration is a major problem that is bad for the country and can only be resolved properly by leaving the European Union.
Britain’s financial services sector, by far the largest and most sophisticated in Europe, would suffer if Brexit occurred, as would the nation’s exports and the wider economy, said Standard & Poor’s (S&P). Britain’s ability to fund the large deficit in its balance of payments would be undermined if it left the EU.
S&P said in a statement:
“In a worst-case scenario, a Brexit could also harm sterling’s role as a global reserve currency, removing what has been a significant support for our ‘AAA’ rating on the U.K. since the start of the global financial crisis.”
Lord Norman Blackwell, chairman of Lloyds Banking group, said in the House of Lords in October, during a debate on the government’s EU referendum bill: “I do not agree that remaining in the European Union without a significant change in the current treaty arrangements is ultimately sustainable from a political and constitutional perspective. Nor do I believe that there is a compelling economic argument to override those considerations.”
Agreement with EU leaders likely to occur
S&P believes Prime Minister David Cameron will reach an agreement in 2016 with the rest of the European Union regarding reforms. The two credit agencies predict that most Britons will vote to stay within the trading bloc if a decent agreement with other EU leaders is secured.
However, more donations are being channeled to the anti-EU campaigners than the pro-EU ones, S&P noted, which may influence how voters eventually decide.
Reuters news agency quoted a statement from Fitch, which said:
“The implications for the rating would depend on several factors, including the impact on medium-term growth and investment prospects, the UK’s external position, and the risk of triggering a second referendum on Scottish independence.”
IMF praises UK but warns of Brexit consequences
The IMF, in its latest assessment of the UK economy – ‘United Kingdom—2015 Article IV Consultation Concluding Statement of the Mission‘ – said:
“The UK’s recent economic performance has been strong, and considerable progress has been achieved in addressing underlying vulnerabilities.”
“Growth has exceeded that of the other major advanced economies, the unemployment rate has fallen substantially, employment has reached an historic high, the fiscal deficit has been reduced, and financial sector resilience has increased.”
However, it also listed several key risks, including the impending EU referendum. Ms. Lagarde said there was concern that investor confidence may deteriorate as the vote nears, which could damage the UK’s growth prospects.
The IMF said in a statement:
“Uncertainty associated with the outcome of the planned referendum on EU membership could weigh on the outlook.”
CBI recommends staying within EU
The Confederation of British Industry (CBI) believes the UK is better off inside than outside a ‘reformed’ EU. The CBI, along with several of its members from various sectors and of all sizes, announced in October 2015 that the huge benefits of a market with 500 million customers far outweigh anything the country could find elsewhere.
In its document – ‘Choosing Our Future‘ – the CBI explains why the EU is good for business, and how it should be better (what reforms are needed).
The British business organisation, which claims to speak for 190,000 businesses, says that if the UK left the EU, tariffs would return under WTO rules, which would result in considerably higher prices for imported goods and less choice for consumers.
“The CBI speaks for 190,000 firms of all sizes, in every sector and in every corner of the UK, and most of our companies want the UK to be in a reformed EU. For business the benefits of full membership outweigh the disadvantages, but the EU must work better.”
“The Single Market has been the solid foundation of our economic success in recent decades, giving us direct access to 8 times more consumers than in the UK alone and ensuring we can go toe-to-toe with larger economies on major trade deals, creating jobs and economic growth here in the UK.”
“While there are many benefits to EU membership, we should not be blind to the downsides and recognise the EU, like any big institution has its faults and needs to do better.”
“The burden of regulation on smaller firms in particular still needs tackling, even if some progress is being made. And the UK must push for reform to make the whole of the EU more competitive in the global economy and deliver a Single Market fit for the 21st century.”
Video – Brexit worst case scenario