Hard Brexit likely outcome from divorce with EU, says S&P

A hard Brexit is the most likely outcome of Britain's negotiations with the European Union, according to S&P Global Ratings on Friday.

S&P, one of the big three credit ratings agencies, said the country could not guarantee continued unfettered access to export goods and services to the remaining 27 members of the EU after it leaves the trading block.

There is debate on the type of relationship the country should seek with the EU, a hard Brexit - leaving the EU single market and adopting World Trade Organisation rules, or soft Brexit - maintaining access to the single market, which could protect passporting rights which allows financial institutions to conduct business across the EU.

The ratings agency said the referendum had “deepened and laid bare the schisms in British society” and that the Britain would be affected the most as the effect on the world economy is likely to be “more limited”, as its economy accounts for a “small and shrinking share of global gross domestic product (GDP)”.

After the referendum in June, S&P lowered the country’s rating to ‘AA’ from ‘AAA’ and kept its negative outlook, which was “an extraordinary rating action” for an “unprecedented” Brexit, which comes with multiple risks that are partly under the government's control, according to Moritz Kraemer, S&P’s chief credit officer.

“With the downgrade, we kept the negative outlook, indicating that the rating could be lowered again. The negative outlook reflects the multiple risks emanating from the decision to leave the EU, exacerbated by what we consider to be reduced capacity to respond to those risks. This assertion is based on what we view as the UK's weaker institutional capacity for effective, predictable, and stable policy making, ” he said.

S&P said the country has not accepted that EU countries are likely to stick to its four freedoms: the free movement of people, capital, goods, and services.

Kraemer added: "But even if Westminster were to acknowledge the EU position, it is hard to fathom how a rather hard Brexit can be avoided unless both sides become much more flexible than they appear today. Nothing today suggests that a common quest for compromise will overcome the gulf that now looks as wide as the English Channel."