Daily Management Review

Moody's: the Way out of the EU Will Hit Britain


The experts of Moody's rating agency identified the main risks that could result in a downgrade of the UK credit rating in the future.

Reuters/Brendan McDermid
Reuters/Brendan McDermid
According to published estimates of Moody's Investors Service analysts, in 2015-2016, UK economy will show a stable trend (with GDP growth rates of 2.7% and 2.4%, respectively). One of the major vulnerabilities in the long run will remain a high amount of debt the country. Analysts also noted the likelihood of slowing of the British economy in the event of loss of productivity in the coming years.

At the same time Moody's pointed to two risk factors that are unique to the UK, which could have a negative impact on the growth rate of the UK economy, and the country's sovereign credit rating.

Firstly, it is a referendum on Britain's membership of the EU, which can be held over the next year - earlier than expected. Although the transfer of holding a referendum on the earlier date will reduce the period of uncertainty, it will also reduce the time that is available for the negotiation of reforms and the repatriation of certain powers, on which the British authorities insist. From Moody's perspective, holding a referendum prematurely increases the risk that the British authorities would not agree with the EU on the changes they seek. This in turn could adversely affect the willingness of the government to further support the British position on staying in the EU. Although the outcome of the referendum is uncertain, in Moody's believe that the way out of the EU may have a negative impact on the growth prospects of the British economy. With this in mind, and in the absence of alternative trade arrangements, which would at least partly repeat the current access to the EU's single market, the UK's sovereign rating will likely be under pressure.

Second, the pace of fiscal decentralization of powers in Scotland and other regions and cities are accelerated, and the very decentralization can have more serious consequences than previously expected. Although Moody's believe that the government is likely to be able to maintain a sufficiently strong control and supervision in order to prevent serious damage from decentralization in the fiscal plan for the UK economy, the risk of movement in Great Britain to more serious federalization in financial terms will become more evident only after a certain time.

Official plans to hold a referendum on EU membership until the end of 2017 were announced in late May 2015, at the speech from the throne of the British Queen Elizabeth II.

source: bloomberg.com