Moody’s says it may cut out­look on Aa1

Financial Mirror (Cyprus) - - FRONT PAGE -

If the UK were to leave the EU, the credit im­pact for the sov­er­eign and the im­pli­ca­tions for its rat­ing would de­pend pri­mar­ily on what new trade ar­range­ments the UK gov­ern­ment could achieve, as well as its other eco­nomic pol­icy choices, ac­cord­ing to Moody’s In­vestors Ser­vice.

The rat­ing agency added it might as­sign a neg­a­tive out­look to the Aa1 in the event of a vote to with­draw from the EU, to re­flect its view that exit would have neg­a­tive con­se­quences for the UK econ­omy and hence po­ten­tially for the UK’s credit strength.

“Exit would be neg­a­tive for trade and in­vest­ment in the UK, given the close links with the EU as the UK’s sin­gle most im­por­tant trad­ing part­ner and largest source of for­eign-direct in­vest­ment,” said Kathrin Muehlbron­ner, a Se­nior Vice Pres­i­dent at Moody’s. “Th­ese out­weigh the ben­e­fits from exit such as cost sav­ings for gov­ern­ment and a re­duced reg­u­la­tory bur­den for busi­nesses in our view,” she added.

How­ever, rather than the short-term im­pact on growth, Moody’s would fo­cus on the medium term eco­nomic and po­lit­i­cal im­pact of an exit. In the rat­ing agency’s view, exit from the EU would not pro­vide im­me­di­ate clar­i­fi­ca­tion on the UK’s fu­ture trade and eco­nomic prospects. In­stead, it would likely be the be­gin­ning of po­ten­tially mul­ti­ple, lengthy and com­plex ne­go­ti­a­tions on a new trade agree­ment with the EU that con­serves at least part of the ben­e­fits that EU mem­ber­ship af­fords.

“The UK could face a po­ten­tially pro­longed pe­riod of un­cer­tainty, which in it­self would be dam­ag­ing to con­fi­dence and in­vest­ment. A Swiss-style se­ries of bi­lat­eral agree­ments or a com­pre­hen­sive free trade agree­ment would in­vari­ably take time to ne­go­ti­ate and this process wouldn’t be easy,” said Muehlbron­ner. Ac­cord­ing to EU leg­is­la­tion, ef­fec­tive with­drawal from the EU could take up to two years, dur­ing which the out­line of an al­ter­na­tive ar­range­ment would likely emerge. In ad­di­tion to ne­go­ti­at­ing with the EU on a new trade deal, the UK au­thor­i­ties would prob­a­bly have to rene­go­ti­ate other bi­lat­eral and mul­ti­lat­eral free trade agree­ments that the UK cur­rently ben­e­fits from as an EU mem­ber state.

The UK might also re­con­sider other do­mes­tic poli­cies, such as bank­ing reg­u­la­tion, in or­der to limit the im­pact on the fi­nan­cial ser­vices sec­tor. While Moody’s con­sid­ers the UK’s in­sti­tu­tional strength to be very high, exit and the as­so­ci­ated chal­lenges would place a sig­nif­i­cant bur­den on pol­icy-makers and the agency would mon­i­tor the im­pli­ca­tions for the ef­fec­tive­ness of pol­i­cy­mak­ing very closely.

Th­ese chal­lenges would likely out­weigh the eco­nomic ben­e­fits of exit, ac­cord­ing to Moody’s. The cost sav­ings on the gov­ern­ment’s con­tri­bu­tions to the EU bud­get are mod­est at around 0.6% of GDP per an­num and in the rat­ing agency’s view UK-based busi­nesses would con­tinue to have to com­ply with EU reg­u­la­tion even af­ter exit, if they wanted to sell into the Sin­gle Mar­ket.

Moody’s also noted that EU reg­u­la­tion has not im­peded the UK’s flex­i­ble labour and prod­uct mar­kets, nor does the EU seem to be a key con­strain­ing fac­tor for ex­tra-EU trade, as Ger­many’ strong trade links with China and other emerg­ing mar­kets show.

The EU ac­counts for around 50% of UK goods ex­ports and 37% of ser­vices ex­ports (2014 data). Last year, the UK re­ceived net for­eign-direct in­vest­ment (FDI) of GBP 44 bln, which equates to around a third of all EU in­vest­ment in­flows, with many in­vest­ments from out­side of the EU at­tracted to the UK as an en­try point to the larger EU mar­ket.

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