Fitch warns on potential negative EU impact of Brexit

A UK vote to leave the European Union in June would weigh on the economies of countries in the single-currency bloc, and increase potential political risks in there, warns Fitch Ratings.

“Negative (ratings) actions would become more likely in the medium term if the economic impact (of UK leaving the EU) were severe or significant political risks materialised,” Fitch said.

It has already stated that it would review UK’s sovereign rating in the event of a leave vote on 23 June. “We would not expect to take any immediate negative rating actions on other EU sovereigns if the UK left.”

The ratings firm’s warning followed Bank of England governor Mark Carney last week receiving flak – he later defended his Super Thursday position as “straight and transparent” – for warning that risks to the UK of leaving the EU could possibly include a technical recession, defined as two consecutive quarters of falling economic output.

The central bank’s Monetary Policy Committee separately warned a Brexit could see sterling weaker, falling economic growth and rising joblessness.

Confederation of British Industry (CBI) said UK was a more attractive place to invest if it remained in the EU.

“The UK has the best of both worlds by being able to trade easily with nations both from the Commonwealth and from the EU,” CBI said. “Our membership of the EU gives us a home market of 500m customers, while EU trade deals open up new opportunities in markets across the world, including our historic Commonwealth friends.”

Fitch continued that the economic impact of Brexit would be lower for the EU than for the UK, but would “still be palpable.” It would reduce EU exports to the UK, although the extent would depend on the nature of any UK-EU trade deal and the degree and duration of sterling depreciation, Fitch said in a statement.

S&P Global said the prospect of the referendum appeared to be weighing on economic activity. It said real GDP growth had slowed to 0.4% in Q1, from 0.6% in Q4 2015, while high-frequency data at the start of Q2 was bringing more evidence that activity remained sluggish, namely purchasing managers’ indices and commercial property volumes.

Fitch said the countries most exposed to a Brexit included Ireland, Malta, Belgium, Netherlands, Cyprus and Luxembourg, all of whose exports of goods and services to the UK are at least 8% of GDP.

“EU countries could gain from the shift of some Foreign Direct Investment (FDI) from the UK to the EU. However, countries such as Luxembourg, Malta, Belgium and Germany, with a large stock of FDI and financial assets in the UK, would suffer losses in the euro value of those assets if there were a permanent depreciation of sterling.

“The banking sectors of Ireland, Malta, Luxembourg, Spain, France and Germany have sizeable links to that of the UK.

“Brexit would reduce the UK's contribution to the EU budget (a net EUR7.1bn in 2014 after rebates), potentially to zero. This would imply that other net contributors would have to increase payments, or net recipients accept lower EU expenditure.”

Fitch further cautioned that a Brexit vote could shift the centre of gravity of the EU, “making it more dominated by the eurozone core, poorer, more protectionist and less economically liberal. If the UK were to thrive outside of the EU, it might encourage other countries to follow suit.

“Brexit could precipitate Scotland leaving the UK, which might intensify secessionist pressures in other parts of the EU, such as Catalonia in Spain.”