Standard & Poor’s cut short David Cameron’s post-election honeymoon on Friday, casting doubt over Britain’s ability to maintain its top-notch credit rating in light of the decision to hold a referendum on EU membership.
If Britain appears likely to leave the EU, the credit rating agency warned that it might respond with a large drop in the nation’s ratings on fears of difficulties with funding the deficit and bad trade relationships with Europe. In citing the wider dangers of the UK flirting with “Brexit”, S&P has become the most vocal business organisation yet to worry about the dangers of the referendum and comes in the same week that President Barack Obama said he was “ looking forward” to Britain remaining part of the EU.
S&P waited until markets had closed on Friday to publish its report, suggesting that the decision to hold a referendum before the end of 2017 risked economic policy becoming “more exposed to party politics than we had previously anticipated”.
The agency said that the referendum would undermine the predictability of UK economic policy and that this “could negatively affect sustainable public finances, balanced economic growth, and the response to economic or political shocks”.
It retained the UK’s triple A rating, but downgraded the outlook from “stable” to “negative”, saying that “there is at least a one-in-three probability of a downgrade over the next two years”.
Even before the referendum, if the UK appeared to be set to leave the EU, it said “we could lower the rating by potentially more than one notch, depending on the circumstances, such as the expected future relations with the EU”. Departure from the union would raise questions about the financing of Britain’s large deficits on the public finances and on trade, it added.
The Treasury declined to respond directly to S&P’s comments. But it defended the decision to hold a referendum, saying that it would resolve “the uncertainty around Britain’s relationship with the EU”.
“In doing this, we are seeking economic reforms that will deliver long term prosperity for the working people of Britain and the rest of Europe,” it said.
One of S&P’s fears over Brexit is that it would lead to a messy break-up of the UK, with Scotland becoming independent, raising further doubts about the ease of financing the UK’s debt levels.
S&P has been the rating agency most supportive of the coalition government and the Tories in recent years and the only one not to remove the top-notch triple A rating. In late 2012, it also gave the UK a negative outlook, but restored the highest rating in August last year.
Moody’s said earlier this week that an early EU referendum increased the chances of a downgrade because it reduced the chances of a successful renegotiation of Britain’s relationship with the union.
S&P warned that the UK attracted a disproportionate amount of foreign direct investment into the country, partly because of its EU membership, “solidifying its role as a global financial centre”.
These features of the UK economy had allowed the rating agency to maintain the UK’s highest credit rating even though its public-sector debt level is the highest of any other country that has its cherished triple A rating.
Moody’s and Fitch, the other two large credit rating agencies, removed the UK’s top rating in the aftermath of the crisis and have not yet restored them.
Letter in response to this report:A bit of ‘bad’ news that’s all to the good / From Dick Denby