22 September 2017

Bloomberg: May hit by credit rating blow as she reboots UK Brexit plan

It lowered the U.K. on Friday by one notch to Aa2, the third-highest investment grade. While both other major rating companies downgraded Britain shortly after the referendum in 2016, this is the first cut since May’s election gamble backfired this summer, wiping out her majority, and, according to Moody’s, forcing her into unhelpful fiscal compromises.

[...] Moody’s assessment of the exit was less than optimistic: “Moody’s is no longer confident that the U.K. government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.”

It expects weaker public finances, partly due to slower economic growth, but also reflecting “increasing political and social pressures to raise spending after seven years of spending cuts.” The decision was part of the rating companies scheduled calendar of sovereign reviews.

The election “reinforced some of those concerns around the fiscal policy that we had before,” said Kathrin Muehlbronner, lead U.K. Sovereign Analyst at Moody’s. “The low hanging fruit has been picked and the fat has been trimmed. That clearly has been an issue during the election campaign.” [...]

“Fiscal pressures will be exacerbated by the erosion of the U.K.’s medium-term economic strength,” Moody’s said. There are “increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.”

While years of austerity have brought down the budget deficit since the financial crisis, debt remains high by advanced-economy standards. Moody’s expects it to hit almost 90 percent of GDP this year and only peak in 2019, two years later than the government plans. [...]

Full article on Bloomberg

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