Risk of ‘Brexit’ is a stronger credit driver than un­cer­tainty over elec­tion, says Moody’s

Financial Mirror (Cyprus) - - FRONT PAGE -

The un­cer­tainty over the out­come of the forth­com­ing gen­eral elec­tions in the United King­dom is not af­fect­ing the sovereign’s credit pro­file of Aa1 ‘sta­ble’, Moody’s In­vestors Ser­vice said, adding that in con­trast, an in­creased like­li­hood of the UK leav­ing the EU could re­sult in neg­a­tive rat­ing pres­sures over the medium-term.

Ac­cord­ing to Moody’s, nei­ther a pe­riod of po­lit­i­cal un­cer­tainty fol­low­ing the elec­tions nor the com­po­si­tion of the next gov­ern­ment would likely af­fect the UK’s credit pro­file. The rat­ing agency noted that all ma­jor par­ties are com­mit­ted to fur­ther fis­cal con­sol­i­da­tion, even if the ap­proach and pace dif­fer to some ex­tent.

The rat­ing agency also pointed to the UK’s strong and sta­ble in­sti­tu­tions, which should en­sure a smooth run­ning of gov­ern­ment dur­ing any in­terim pe­riod. The po­ten­tial trans­fer of fis­cal re­spon­si­bil­i­ties to Scot­land and other sub­na­tional gov­ern­ments would not pose a sig­nif­i­cant risk to the UK gov­ern­ment’s fis­cal strength.

Moody’s noted that the elec­tion out­come will pro­vide greater visibility on whether a ref­er­en­dum on the UK’s membership in the Euro­pean Union will be held. While it re­mains un­clear whether this would in­deed lead to an exit, if the like­li­hood of the UK leav­ing the EU were to in­crease, Moody’s said it would an­a­lyse the im­pact on the UK’s growth prospects.

As the EU ac­counts for around 50% of the UK’s goods and 36% of its ser­vices ex­ports, a with­drawal from the EU could have neg­a­tive im­pli­ca­tions for trade and in­vest­ment, both ahead of the event and fol­low­ing it.

The medium-term im­pact — which is the rel­e­vant time­frame from a credit per­spec­tive — would de­pend on what al­ter­na­tive trade agree­ments the UK could ne­go­ti­ate with the EU.

Moody’s ex­pects that the UK would man­age to ne­go­ti­ate some form of new set­tle­ment that repli­cates at least part of the cur­rent trade free­doms, but notes that the ab­sence of such a set­tle­ment would ad­versely af­fect in­vest­ment and growth and have neg­a­tive im­pli­ca­tions for the UK’s credit stand­ing and rat­ing.

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