Ratings firms eye fallout from shock UK election

The agencies responsible for Britain’s credit rating said on Friday that inconclusive national elections could impact Brexit negotiations, lead to another snap poll and change the future path of economic policy. Voters dealt Prime Minister Theresa May a devastating blow in a ballot she had called to strengthen her hand in Brexit talks, wiping out her parliamentary majority and throwing the country into political turmoil.

May was attempting to form a working relationship with unionists from Northern Ireland to stay in power. The three biggest firms - Fitch, Moody’s and S&P Global - all have a negative outlook on their respective ratings for Britain. Ratings influence at what cost a government can borrow money in financial markets.

While no agency changed their rating on Friday, they all issued statements warning of the risks the new political questions pose on Britain, the world’s fifth biggest economy.

“The UK general election result creates uncertainty over the policy platform, political cohesion and longevity of the next UK government,” Fitch said in a statement. “This will have implications for Brexit and potentially fiscal policy.”

Fitch added that the hung parliament increased the range of possible outcomes to British talks on leaving the European Union - including a disorderly exit and potentially a “softer” deal. S&P Global said the election won’t immediately affect the country’s credit ratings but warned it could create further uncertainty by potentially delaying Brexit negotiations. “In our view, the lack of a majority for any party is likely to delay Brexit negotiations, scheduled to start very soon,” S&P Global said in an emailed statement. “Furthermore, we do not exclude the possibility of another snap election. These considerations are reflected in our current negative outlook on the long-term ratings.” S&P Global and Fitch downgraded the sovereign to AA immediately after a vote last June by the country to leave the European Union.

The opposition Labor party ate into the ruling Conservative’s majority in Thursday’s vote by campaigning left-wing on an anti-austerity, pro-social spending platform. Analysts say this may encourage the government to relax its grip on spending, especially as there is a lack of momentum in the economy. But that could be a worrying sign for ratings firms. Moody’s said that the UK’s rating would depend upon the outcome of Brexit and fiscal developments given the country’s budget deficit and rising public debt.

It said it was “monitoring the UK’s process of forming a new government and will assess the credit implications in due course”.

Moody’s ranks the UK one notch above the other two agencies at Aa1, a rating it has held since February 2013. Fitch also added that the loss of 21 seats by the Scottish National Party reduced the possibility of a second Scottish independence referendum. —Reuters