Brexit could jeopardise sterling´s reserve currency status, S&P says

Leaving the European Union could "jeopardise" the pound´s standing as a reserve currency, make attracting foreign capital dearer, Standard&Poor´s Global Ratings pointed out.

"Sovereigns controlling a reserve currency benefit from extensive external and monetary flexibility, which supports government creditworthiness," said Frank Gill, S&P Global Ratings analyst.

"A UK departure from the EU could put sterling's reserve status at risk by deterring foreign direct investment and other capital inflows into the UK"

The size of the UK´s current account deficit meant that the uncertainty triggered by a decision to leave the EU could deter inbound foreign direct investment and other capital flows, the ratings agency said.

It was also therefore most likely that it would weaken economic growth, directly, and the pound´s value - "possibly considerably" - in foreign exchange markets, as central banks reserve managers shifted towards alternative assets with less 'headline-risk', S&P explained.

The cost of capital for firms, households and the Treasury itself would also increase, making servicing the country´s debt dearer, as the benefits for the UK´s AAA long-term credit rating were put at risk.

Britain´s current account deficit was the second-highest on the planet in absolute terms in 2015 and overall the UK had the fifth-highest public plus private gross external debt burden in the world, to the tune of 412% of GDP, according to S&P.

S&P also pegged the benefits from so-called 'seignorage' - the income which accrues from other countries wanting to use your currency - at between 0.2% and 0.6% of GDP each year.

"In our view, well before the yuan rises in importance as a convertible alternative to major currencies, other risks, including Brexit, could strike a blow to sterling's reserve status, and this would diminish the economic gains from seigniorage and potentially even more to the low funding costs that benefit the U.K. economy today."