U.K. May Face Downgrade if Trade Deal With EU Falls Short, Takes Too Long

Brexit has hampered the U.K.’s medium-term economic outlook, but Moody’s Investors Service believes the scale of Brexit’s damage to the U.K.’s growth prospects will depend on whether the trading relationship with the European Union (EU) remains similar to what it has been, as well as how long it will take to strike a new deal with the EU.

“We would downgrade the U.K.'s sovereign rating if the outcome of the negotiations with the EU was a loss of access to the Single Market, as this would materially damage its medium-term growth prospects," said Kathrin Muehlbronner, a Moody's senior vice president and co-author of a recent report on the topic. "A second trigger for a downgrade would be if we were to conclude that the credibility of the U.K.'s fiscal policy had been tarnished as a result of Brexit or other reasons." The U.K. government's Autumn Statement, which is slated for Nov. 23, will likely give significantly more clarity to this issue, Moody’s analysts said.

Moody’s current expectation is that the U.K. will eventually enter into some form of trade agreement with the EU, most likely in a series of accords that provide access to the EU market for goods with more limited access for services, especially financial services.

Analysts anticipate lengthy negotiations, however, with the government starting the exit process by as late as March 2017; even the two-year deadline set by the Lisbon Treaty may be too little time to finalize the process.

“But once negotiations start, the agency expects that the spirit in which they are handled by both sides will offer important insights into the likely outcome,” Moody’s said. Complex and challenging issues to be ironed out in the deal include global trade, immigration and regulation. “Given the magnitude and complexity of these decisions, the risk is material that some might damage the U.K.'s economic or fiscal strength.”

– Nicholas Stern, editorial associate

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