UK rating could be downgraded if it doesn't get good Brexit deal, says Moody's

Moody’s warned on Wednesday that the UK’s sovereign rating could be downgraded if it is unable to protect core elements of its access to the European Single Market.

The ratings agency said the Aa1 rating would be downgraded if the UK’s loss of access to the single market following Brexit were to materially weaken medium-term growth and if the credibility of UK fiscal policy were to be undermined.

"We would downgrade the UK's sovereign rating if the outcome of the negotiations with the EU was a loss of access to the Single Market as this would materially damage its medium-term growth prospects", said Kathrin Muehlbronner, a Moody's Senior Vice President.

"A second trigger for a downgrade would be if we were to conclude that the credibility of the UK's fiscal policy had been tarnished as a result of Brexit or other reasons."

Moody’s said the Autumn Statement on 23 November is likely to bring more clarity in this area.

The agency pointed to financial services and said the loss of passporting rights that operate across jurisdictions would be credit negative but manageable.

“The greatest impact would be felt through higher costs and increased inefficiency as the companies restructure, leading to reduced profitability for some time.”

The agency’s current baseline expectation is that the UK will eventually manage to enter into some form of free trade agreement with the EU. One scenario it considers to be realistic is a series of accords offering access to the EU market for goods and more constrained access for services, in particular financial services.

However, it said such an outcome is far from certain and expects the negotiations to be protracted.

Moody’s downgraded its outlook on the UK to ‘negative’ from ‘stable’ the day after the EU referendum.

It said at the time: “During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody's expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth. Over the longer term, should the UK not be able to secure a favourable alternative trade arrangement with the EU and other countries, the UK's growth prospects would be materially weaker than currently expected.”