Moody’s: Brexit poses man­age­able credit chal­lenges for both UK and the EU

Financial Mirror (Cyprus) - - FRONT PAGE -

The eco­nomic costs of the UK leav­ing the Euro­pean Union would out­weigh the po­ten­tial ben­e­fits and would have credit im­pli­ca­tions for a range of bond is­suers, in­clud­ing the UK gov­ern­ment, banks, in­sur­ers and non-fi­nan­cial com­pa­nies, Moody’s In­vestors Ser­vice said in a re­port.

The re­port as­sesses the po­ten­tial eco­nomic and credit im­pact of a Bri­tish vote to leave the EU, known as “Brexit”, on non­fi­nan­cial cor­po­rates, in­fra­struc­ture com­pa­nies, banks, in­sur­ers, sub-sov­er­eigns, struc­tured finance se­cu­ri­ties and EU-based is­suers.

“A UK vote to leave the EU would cre­ate height­ened un­cer­tainty, which would lead to mod­estly weaker eco­nomic growth in the UK over the medium-term,” said the re­port’s coau­thor Colin El­lis. “Brexit would have credit im­pli­ca­tions across dif­fer­ent sec­tors.”

As pre­vi­ously stated, fol­low­ing a vote to leave, Moody’s might as­sign a neg­a­tive outlook to the UK’s Aa1 sovereign rat­ing to re­flect the height­ened un­cer­tainty and the weaker growth pic­ture. It is highly un­likely that the UK’s ex­ist­ing ar­range­ments with the EU would be repli­cated in full fol­low­ing a vote to leave.

How­ever, Moody’s cen­tral view is that both the UK and the EU would want to avoid an un­nec­es­sary large-scale dis­rup­tion to trade and cap­i­tal flows, given their deep eco­nomic and fi­nan­cial ties.

For non-fi­nan­cial cor­po­rate is­suers in the UK, a Brexit would be credit neg­a­tive, re­flect­ing the weak­ened macroe­co­nomic outlook. While Moody’s be­lieves the UK and the EU would pre­serve most of their ex­ist­ing trad­ing re­la­tion­ships, any sub­stan­tial new bar­ri­ers to trade would pose a more sig­nif­i­cant threat to cor­po­rate cred­it­wor­thi­ness. In­fra­struc­ture com­pa­nies could face un­cer­tainty around new reg­u­la­tory regimes.

The im­pact on the in­surance in­dus­try would be man­age­able, un­less there is sig­nif­i­cant dis­rup­tion to “pass­port­ing”, which al­lows com­pa­nies to pro­vide cross­bor­der ser­vices.

There would be lim­ited credit im­pli­ca­tions for banks based in the UK or for for­eign banks with siz­able sub­sidiaries. The im­pact on banks’ credit fun­da­men­tals would be most pro­nounced for banks with cross­bor­der busi­ness mod­els, al­though these banks are re­duc­ing their in­ter­na­tional ex­po­sure.

For sub-sov­er­eigns, the neg­a­tive eco­nomic con­se­quences from Brexit could put pres­sure on trans­fers from the cen­tral gov­ern­ment, while some is­suers, such as uni­ver­si­ties and lo­cal au­thor­i­ties, could also face the loss of EU fund­ing.

The im­pact on struc­tured credit qual­ity would likely be small. Given the rel­a­tively mod­est eco­nomic im­pact from Brexit, Moody’s would not ex­pect to see sig­nif­i­cant in­creases in un­em­ploy­ment and pol­icy rates or de­clines in prop­erty prices.

The general un­cer­tainty fol­low­ing a Brexit vote would likely hit con­fi­dence across the EU and could weigh on eco­nomic growth. Brexit would also be credit neg­a­tive for the EU as it could in­crease the risk of fur­ther ex­its from the bloc and heighten sup­port for in­de­pen­dence move­ments else­where.

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