Ratings agencies cut Britain's credit score

A taxi driver holds a Union flag, as he celebrates following the result of the EU referendum, in central London, Britain on June 24, 2016.
A taxi driver holds a Union flag, as he celebrates following the result of the EU referendum, in central London, Britain on June 24, 2016.PHOTO: REUTERS

LONDON • Britain suffered further blows to its economic standing as two top ratings agencies downgraded its sovereign credit score, after the country's decision last week to leave the European Union left it in political and economic paralysis.

Standard & Poor's (S&P) lowered the grade by two steps to AA from AAA, while Fitch cut its credit rank by one step, to an equivalent level. Both have negative outlooks and said more cuts would follow.

The downgrade "reflects the risks of a marked deterioration of external financing conditions" and constitutional issues arising from the majority of voters in Scotland and Northern Ireland having opted to stay in the EU, according to S&P.

Fitch cited the likelihood of "an abrupt slowdown" in economic growth.

Moody's was the first to take concrete action after the vote last week, assigning a negative outlook to Aa1 rating for British government debt. It had already taken away the country's AAA rating in 2013 because of the country's high levels of debt and slow growth.

"During the several years in which the UK will have to renegotiate its trade relations with the EU, Moody's expects heightened uncertainty, diminished confidence and lower spending and investment to result in weaker growth," the agency had said.

The ratings agencies effectively added a rubber stamp to the market's view of the Brexit vote, as sterling tanked and stock markets fell following the referendum last Thursday, although both have since recovered. Sterling strengthened 0.6 per cent to US$1.3306, while the Stoxx Europe 600 Index rebounded 2.5 per cent to 316.44 at 10.11am yesterday in London.

The rise was supported by technical indicators that suggested the record two-day losses were excessive, analysts said.

The downgrades come after a day of deepening political division in Britain. Prime Minister David Cameron announced last week that he would step down, while the opposition Labour Party faces fresh turmoil after the resignation of senior party figures.

British government bonds have surged, pushing the 10-year yield below 1 per cent for the first time, amid speculation that the Bank of England will cut interest rates to a record low as soon as next month to ward off the risk of recession.

This was the first time S&P had chopped an AAA-rated sovereign credit rating. "What we've observed now in the context of this referendum and the Brexit vote is such that we do no longer think that the institutional strength of the UK is what we had been used to before," S&P's global sovereign chief ratings officer Moritz Kraemer said on Bloomberg Television.

Moody's is also expected to downgrade the credit rating outlook for major British banks to "negative", Sky News reported, citing sources.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on June 29, 2016, with the headline 'Ratings agencies cut Britain's credit score'. Print Edition | Subscribe