British exit from EU is 'significant' risk and will add volatility, says Fitch

If Britain votes to leave the European Union it would not only harm UK growth and investment prospects but would be likely to reignite and strengthen Scotland's push for independence, according to ratings agency Fitch.

With a referendum on EU membership expected to be held in the second half of next year, Fitch said the risk of Brexit was "significant", though its baseline assumption is that the UK will remain in the EU.

Prime Minister David Cameron's attempts to renegotiate the terms of Britain's EU membership have met "substantial political differences" it emerged last Monday, though good progress had been made on at least two of the Prime Minister's four demands.

European Council president Donald Tusk suggested the EU had substantial problems over Cameron's issues with benefits and free movement of persons.

While Fitch is confident the UK will be able to secure a membership reforming deal, the risk that the government may not get agreement to restrict "in-work" and family benefits for EU nationals working in the UK would make it harder for the pro-EU "in" campaign to rally around the call to stay in a "reformed Europe".

If the country does vote to leave the EU it would be only "moderately" negative for the UK's credit rating, Fitch said, although the longer-term economic impact of leaving the EU is impossible to gauge. The impact on the credit rating is not likely to be pronounced unless trade relations are meaningfully disrupted.

However, the agency was sure of one thing: that the unpredictable nature of such referendums raises the significant possibility that the vote will tip towards Brexit and lead to short-term volatility in financial markets.

If the 'leave' vote triumphs, Fitch said it would delay major foreign direct investment decisions until the UK's relationship with the EU is clarified and, if the UK as a whole were to votes to leave but voters in Scotland opt for 'Remain', this would surely lead to a second referendum on Scottish independence .

"The Scottish National Party's dominant position in Scottish politics and the removal of one of the key arguments used against the pro-independence campaign (loss of EU membership) mean the risk of this second Scottish poll delivering a 'Yes' to independence would be high."