Daily Management Review

As May Reboots U.K. Brexit Plan, She Is Hit By Credit Rating Blow


09/24/2017




As May Reboots U.K. Brexit Plan, She Is Hit By Credit Rating Blow
Blaming Brexit, a sluggish economy and Theresa May’s weakened political position, Moody’s Investors Service cut the U.K.’s credit rating.
 
Dropping the rating to what is the third-highest investment grade, the ratings agency lowered the U.K. on Friday by one notch to Aa2.
 
According to Moody’s, U.K. Prime Minister Theresa May has been forced into unhelpful fiscal compromises by May’s election gamble that backfired this summer and wiped out her majority and this is the first cut since then even though both other major rating companies downgraded Britain shortly after the referendum in 2016.
 
A key speech on her vision for the U.K.’s separation from the European Union was delivered by Prime Minister May and the Moody’s announcement came just hours after May’s speech. Un her speech, May failed to outline specifics on the divorce bill even though she said she would seek a transition period of around two years after Brexit. Moody’s assessment of the exit was less than optimistic.
 
“Moody’s is no longer confident that the U.K. government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.”
 
While reflecting “increasing political and social pressures to raise spending after seven years of spending cuts”, Moody’s expects weaker public finances, partly due to slower economic growth. The decision was part of the rating companies scheduled calendar of sovereign reviews.
 
The election “reinforced some of those concerns around the fiscal policy that we had before,” said Kathrin Muehlbronner, lead U.K. Sovereign Analyst at Moody’s. “The low hanging fruit has been picked and the fat has been trimmed. That clearly has been an issue during the election campaign.”
 
After May set out what it said was an “ambitious vision” for Brexit, the government responded that the rating assessment is out of date. The government also said it’s “not complacent about the challenges ahead but we are optimistic.”
 
Since she lost the government’s majority, May’s ability to persist with austerity has been weakened. She has agreed to more spending in Northern Ireland to get support from a regional party to keep her in power, is increasing pay for some public sector workers and has abandoned a pledge to review state pensions.
 
“Fiscal pressures will be exacerbated by the erosion of the U.K.’s medium-term economic strength,” Moody’s said. There are “increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.”
 
Debt remains high by advanced-economy standards even though years of austerity have brought down the budget deficit since the financial crisis. Moody’s expects it to only peak in 2019, two years later than the government plans and to hit almost 90 percent of GDP this year.
 
“Brexit is a hugely complex undertaking and will dominate policy making in the years to come,” Muehlbronner said. “It’s difficult to imagine the government being able to have any focus on anything else.”
 
(Source:www.bloomberg.com)               






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